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© 2015 Locke Lord LLP

The JOA As A Title Document

H. Martin Gibson Locke Lord LLP 600 Congress Avenue Suite 2200 Austin, Texas 78701 D + 1 512 305 4743 Mgibson@Lockelord.com

JOA As A Title Doc ■ The most popular JOAs are those produced by

the American Association of Professional Landmen ■ Onshore, United States, lower 48 forms promulgated

in 1956, 1977, 1982, and 1989. 1989H for horizontal drilling

■ Form for the Continental Shelf (710), deepwater offshore (810), and others.

■ The RMMLF has its own forms. • Examples from the AAPL Form 610 - 1989

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The JOA As A Cross-Conveyance ■ Some believe JOA creates a cross-conveyance of interests so

each owner holds legal title to its Exhibit A interest in each lease described in Exhibit A. The relevant language:

■ WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interest in the land identified in Exhibit “A,” and the parties hereto have reached an agreement to explore and develop these leases and/or Oil and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided.

■ Exhibit “A,” shall include the following information: ■ (1) Description of lands subject to this agreement, ■ *** ■ (4) Percentages or fractional interests of parties to this agreement,

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■ Article II.A. continued: ■ (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this

agreement …. Article II.A. ■ Unless changed by other provisions, all costs and liabilities

incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their interests are set forth in Exhibit “A.” In the same manner, the parties shall also own all production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter. Art. III.B.

■ But Art. III.B., lines 29-31: “Nothing contained in this Article III.B. shall be deemed an assignment or cross-assignment of interests covered hereby, and in the event two or more parties contribute to this agreement jointly owned Leases, the parties’ undivided interests in said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement.”

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The JOA As A Cross-Conveyance

The JOA As A Cross-Conveyance ■ One Texas Case, p.2 ■ Gillring Oil Co. v. Hughes, a 1981 Texas Civ. App. From

Beaumont. ■ Contract Area of 401 acres, several leases. ■ Formed 320 acre Unit entirely within the Contract Area. ■ Gillring owned no interest in excluded tracts. Owned

75% of one 25 acre tract. ■ Gillring sued to distribute production based on

ownership of Unit, not Exhibit A to JOA. ■ Court of Appeals

■ By executing the operating agreement, Gillring had relinquished 75% of its ownership in the 25 acres in exchange for 6.23% of each acre within the 401 acres.

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■ Gillring Case ■ JOA Language:

■ “(A)ll costs and liabilities incurred in operations under this contract shall be borne and paid, and all equipment and material acquired in operations on the Unit Area shall be owned, by the parties as their interests are given in Exhibit ‘A.’ All production of oil and gas from the Unit Area, subject to the payment of lessor’s royalties, shall also be owned by the parties in the same manner.”

■ The 1956 form lacks the following language from all subsequent AAPL Forms: "however, this shall not be deemed an assignment or cross-assignment of interests covered hereby."

■ Unlikely that a Texas court will conclude that the current AAPL Form JOA results in a cross-conveyance of interest in the Exhibit A leases.

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The JOA As A Cross-Conveyance

■ What if it were a cross-conveyance?

■ Parties to the JOA are in privity of estate with lessor. ■ Each party liable for the performance of the

covenants, express and implied, under each lease. ■ Conveyance by WIO must be as to each lease in

Exhibit A instead of in the original lease. ■ Normal cotenancy rights substantially modified by the

JOA. ■ A changes the royalty burdens.

■ WIOs contributing low royalty leases lose the economic advantage.

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The JOA As A Cross-Conveyance

Surrender of Interest ■ Non-Consent ■ Parties to JOA agree to participate in the Initial Well. ■ The parties elect whether or not to participate in

subsequent operations. ■ This election process is outlined in Article VI of the JOA. ■ Each may participate or not participate in a subsequent

operation. ■ Party not participating subject to a “penalty” for not

consenting to such operations ■ In the form that penalty is relinquishment interest in the

well and its share of production therefrom.

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Surrender of Interest ■ Non-Consent ■ Parties may customize non-consent penalty:

■ “sit out-fall out” (non-consent results in the permanent relinquishment of the Non-Consenting Party’s interest in the well)

■ May farmout in lieu of non-consent. ■ Standard: relinquishment until the proceeds (after deducting

taxes and other lease burdens) equals percentage of the costs incurred with respect to both (i) surface equipment and operating expenses, and (ii) the costs and expenses of drilling and the equipment in the well.

■ Non-consent penalty rewards parties who assume the Non-Consenting Party’s interests and reward the Consenting Parties for accepting additional risk.

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Surrender of Interest ■ Non-Consent

■ Not a cross-conveyance “nothing more than a rearrangement of contractual

rights and obligations of the partners as to specific operations within the enterprise as a whole.” still a party to the JOA and entitled to rights and subject to

obligations. Other

Where parties are co-owners the title implications are more uncertain but should be the same. Non-Consenting Party “relinquishes” its interest in the well and its related production and present ownership is vested in the Consenting Parties until the non-consent penalties have been satisfied.”

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Surrender of Interest ■ Non-Consent

■ Conine: non-consent provision requires conveyance of the working interest during the period of relinquishment.

■ Not supported by current language.

■ Olin case, p. 8 ■ Are non-consenting parties liable for plugging obligations

under RRC regs as non-operators? ■ Held -- a non-consenting party is responsible for plugging

and abandoning a well, even if production from the non-consent operation has yet to recoup the non-consent penalties. Ownership of a future interest in the well was still a working interest resulting in liability for plugging even though non-consenting party was not currently bearing its working interest.

■ Distinction ■ Case was about reach of RRC regs, not an interpretation

of JOA. Courts tend to favor expansive reach of police powers.

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Surrender of Interest ■ Not a cross-conveyance -- implications

■ How much of the leasehold working interest is affected? No transfer of WI. Non-consents participate in future wells and future operations in non-consent wellbore.

■ Non-Consenting Party still access Contract Area, information about all operations, vote to surrender leases, vote on the removal/replacement of the Operator. ■ Contrary to implied reassignment of working interest.

■ Cross-conveyance not necessary to achieve the intent of the non-consent provision. Only interests re-distributed: ■ Obligation to bear costs ■ Right to production ■ Power to set objectives of the proposed operation

■ Relinquishment viewed as temporary transfer of rights in production and accounting device to compensate parties drilling the well.

■ Derman suggests the non-consenting party consider selling its reversionary interest to party who can assume future liabilities.

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Surrender of Interest ■ Failure to Pay.

■ Option to non-defaulting parties. ■ Notice to defaulting party

■ Notice of Default ■ Then Notice of non-consent election.

■ Special remedy if default is related to drilling new well or the Plugging Back, Sidetracking, Reworking, Deepening or Recompletion.

■ If party defaults in payment of such obligations, following cure period, party “conclusively deemed” to have elected not to participate in the operation and to be a Non-Consenting Party with respect thereto.

■ Retroactive election not to consent to an operation.

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Date of the JOA ■ Not a random act.

■ Failure to enter into JOA or starting operations before JOA signed can result in formation of a mining partnership. ■ Mining partnership implied by law, without written agreement,

creates general partnership with joint and several liability. ■ Date on cover page and in Article XVI should be the

same. ■ Signature blocks should carry a date prior to the

commencement of operations. ■ Initial Well date in Article VI.A. should be after Article

XVI date in order to create a binding obligation. ■ Date in Article XVI sets the date before which a lease

burden will not be considered a Subsequently Created Interest in Article III.

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Express Title Transfers ■The Oil and Gas Interest

■ Refers ONLY to unleased mineral interest ■ Confusing because term is used generally in PSAs to apply to

any leasehold interest. ■ Treated "as if" covered by the form of Oil and Gas Lease

attached as Exhibit B. ■ Owner deemed to own both royalty interest and interest of

lessee. ■ Most parties fail to attached Exhibit B or, if they do, it is not

filled in sufficiently to comply with Statute of Frauds. ■ No requirement that Exhibit B lease be executed or

recorded. Prudent to record under Recording Acts. ■ No case on whether other parties can be BFPs as to Exhibit B

lease. But, without cross-conveyance does it matter? ■ Yes. The parties want the mineral interest and the lease to be

subject to the JOA without third party claims. ■ Recommend that Ex. B be signed as a separate doc when

JOA executed ■ Avoids subjecting the mineral interest to the obligations and

liabilities of the JOA.

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Express Title Transfers ■Mineral Interests

■ Wagner & Brown, Ltd. v. Sheppard, p. 13. ■ 2008 Texas Supreme Court case held authorization to pool

in oil and gas lease applied both to Leasehold interest and to reversionary interest of the lessor ■ When lease expired lessor became a working interest

owner and unit continued. ■ The Ex. B. lease should contain:

■ Language to avoid the result in Sheppard. ■ Provide that the lease terminates when the other leases in

the contract area expire.

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Express Title Transfer ■ Mineral Interests

■ What if Article III.A. is deleted? ■ Often deleted because the owner of the mineral interest does not

want its mineral interest covered by the JOA. Seen where a promoting party does not wish to share its minerals with the other owners and would rather they not know about it. Such deletion puts the mineral owner in an advantageous position with respect to the other non-operators; for example, the mineral owner can choose to be treated as an unleased mineral owner and thus claim a full ownership interest in production (after the recovery of costs).

■ Federal tax law imposed disparate tax treatment on royalties versus working interests ( “windfall” profits tax). Some parties to the JOA elected to treat their mineral interests entirely as working interests with no division of the interest into royalty and working interests by the use of Ex.B. It would behoove that party to secure an exemption from the lien provisions of Article VII.B. for what would have been the royalty portion of the interest. At the very least, such an owner should exempt a reversionary interest in the mineral interest (when production ceases and the JOA expires, I get my minerals back), otherwise a foreclosure on the mineral interest will result in a complete loss of the mineral interest, not just the working interest portion.

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Obviating a Pugh Clause ■ Albert v. Dunlap, p. 13 ■ Lease said expire at end of primary term as to all below

deepest depth drilled – a horizontal Pugh. ■ Before end of primary term, Lessors and Lessees

executed a pooling declaration which pooled production as to all depths covered by the leases.

■ Since, at the time of execution of the declaration, all depths were covered by the lease, the Pugh clause was obviated.

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Allocation of Interests ■ Article III.B.

■ Shares costs and liabilities incurred in operations; ■ Shares revenues " In the same manner [Exhibit A], the parties shall

also own all production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter;"

■ Amongst the WIO owners, each is responsible for its share of costs in the Joint Account, solely with respect to the other parties to the JOA. For leases contributed by the WIO, lessee liable directly to the lessor for compliance with the lease terms;

■ Ownership of "all equipment and materials acquired in operations on the Contract Area" in Ex. A.

■ No ownership provision for Ex. A oil and gas leases.

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Sharing Royalties ■Lease burdens in units, not JOAs, p. 15.

■ TXO v. Prickette. ■ Lessee of one lease in unit not able to sell gas for 21 months

■ Held: unit operator required to pay royalties to the lessors of the non-selling lessee from the date of first production.

■ Based on pooling clause which gave lessor a pro rata share of production from unit. Applied weighted average and requires party selling pay royalties on production throughout the unit.

■ Puckett v. First City National Bank, p. 15. ■ Lessee receiving interstate price (lower)) for production; others

receiving a higher price (intrastate). ■ Held: Parties to unit agreement, except for the plaintiff’s

immediate lessee, had no contractual obligation to lessors. ■ Lessors paid based on price received by their lessee. ■ Court narrowly construed cases holding that pooling

constitutes cross-conveyance by holding that none of the cross-conveyance cases involved the question of royalty allocation.

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Sharing Royalties ■Lease Burdens under the JOA.

■ Article III.B. Does not bind the lessor -- just allocates royalty burden under the JOA.

■ 1. Requires the WIOs to deliver a share of burdens up to a [blank] percentage. ■ Burdens WIO's interest with the lowest royalty figure; distributes on

a weighted average basis. ■ 2. Party who contributed a lease burdened in excess of the

amount in the blank "shall assume and alone bear all such excess obligations…." ■ Allows parties to maintain the higher NRI attributable to lower

royalty leases. ■ Exception. If drilling unit and Contract Area identical each party

must pay all burdens on production from the Contract Area -- the blank is eliminated. ■ Not sure I understand unless it is providing burden sharing that

would work whether the state law provides cross-conveyancing or not.

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Sharing Royalties ■Lease Burdens under the JOA. ■ 1982 version provided for the sharing of royalties. ■ 1989 version provides for the sharing of burdens

and defines same: ■ Royalty, overriding royalty, production payment or

other burden on production. ■ Not aware of the case but obviously, someone

attempted to create a non-royalty "burden" and attempted to avoid sole liability for it by saying it was not a royalty.

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Sharing of Subsequent Burdens ■ Mortgages

■ Leases burdened by mortgage are Subsequently Created Interests, regardless of when created.

■ In fact applies to assignment of production contained in most mortgages.

■ Other Burdens

■ 1. Created after date of JOA; limited to royalty, overriding royalty, production payment, NPI, or other burdens payable out of production; is a "Subsequently Created Interest."

■ 2. Created before date of JOA; not shown on Ex. A; ■ Subsequently Created Interest -- but only if exceeds the amount in

the blank.

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Sharing of Subsequent Burdens ■Subsequent Created Interest: Consequence

■ Burdened Party assumes liability for SCI and indemnifies other parties.

■ If Burdened Party required to assign or relinquish an interest, must be delivered free of the SCI.

■ Subject to all of the Article VII.B. enforcement right that the other parties have against the Burdened Parties. Buts: ■ Holder of the SCI may not be bound by the statement in the

JOA. ■ If holder of SCI pays value, has no notice of JOA and SCI is

delivered prior to filing JOA or memo of JOA of record, then the SCI may be free of enforcement rights.

■ Article VIII.D. requires assignments interests be made subject to JOA; failure to do so creates liability against the transferor but not against the transferee without notice and for consideration.

■ File memorandum of JOA of record. ■ Still may not catch previously assigned interest.

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Specific Title Requirements Operator

■ Required to have title examined on the Drillsite. ■ that “(n)o well shall be drilled on the Contract Area until after (1) the

title to the Drillsite or Drilling Unit … has been examined … and (2) the title has been approved by the examining attorney or title has been accepted by all of the Drilling Parties in such well.” Article IV.A.

■ Do not see title attorney say "approve" in a title opinion. ■ Rare that Operator delays drilling until title has been

accepted by all of the participating parties. ■ Failure to object to "acceptance" by all drilling parties likely waived. ■ What if less than "all" accept the title? No remedy provided in the

JOA. ■ What is examined? "Drillsite."

■ The Leases "on which a proposed well is to be located." ■ In a horizontal well, all tracts touched by the wellbore are "Drillsites."

■ Will the JOA conform? Probably. ■ May want to add to definition of Drillsite, "The term ‘Drillsite,’ when used

in connection with a Horizontal or Multi-lateral Well, means the surface location on the Contract Area (or surface lands in proximity of adjacent thereto) plus the Oil and Gas Lease or Oil and Gas Interests on which wellbores, including all Laterals, are located.

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Failure of Title Process ■ Contributing party 90 days to cure or get new lease. ■ New lease after that time is acquired under Article VIII.B.

■ … each party to the JOA would be entitled to its proportionate share assuming the Exhibit A interests have been adjusted for the lost lease.

■ Party who contributed the lease bears the entire loss and cannot charge the Operator or another party with any of its costs previously paid or incurred.

■ Party who contributed the failed lease "shall bear alone the entire loss…."

■ In horizontal well situation, loss may be greater than the loss of the lease.

■ Browning Case, p. 22 ■ 1979 Leases in Fayette County ■ Standard pooling provision with sharing based on proportion of

acreage in unit. ■ Added by Lessor: “If any pooled unit is created with respect to any

well drilled on the land covered hereby, at least sixty percent (60%) of such pooled unit shall consist of the land covered hereby.”

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Failure of Title ■ Browning

■ Lessee requested this change: ■ In addition to the provisions for pooling, combining or

unitizing as contained in Paragraph 4 of the Lease, in the event Lessee, its successors or assigns, should exercise its right and power, in its sole option and discretion, to pool, unitize or combine the lease premises or any portion thereof with other lands in order to form a unit or pooled unit containing a well with a horizontal drainhole, as defined herein, such unit or pooled unit may, within the discretion of Lessee, its successors or assigns, contain the greatest acreage allowable to the extent prescribed or permitted by the Railroad Commission of Texas or other governmental authority having jurisdiction . . .

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■ Browning ■ Lessors refused to modify. ■ Lessee drilled anyway; 60% of the pooled

units did NOT consist of Luecke’s land. ■ Luecke sued. ■ Lessee’s defense:

■ In order to drill horizontal wells, Lessee was entitled to ignore the lease provision so long as complied with horizontal drilling rules.

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Failure of Title

Medusa Unit 839 Acres Luecke Tracts 268 acres 31% Drillsite Tracts 83 ac 10% Required 60% Hayes Unit 346 Acres Luecke Tracts 114 acres 32% Required 60%

Browning Case

Luecke Luecke

Luecke Luecke

● Wellbore

Hays Drillsite

● Wellbore

Medusa Drillsite

Luecke Luecke

■ Court ■ Parties to oil and gas leases must strictly

comply with its terms. Such compliance applies to pooling clauses.

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Failure of Title

■ Browning ■ Court:

■ Breach "rendered the pooled units invalid with respect to the Lueckes’ land."

■ Without valid pooled units, the leases do not and cannot award the Lueckes royalties on oil and gas produced from tracts they do not own.

■ Rule of Capture does not apply because: (1) the geophysical characteristics of the formation actually inhibit the natural drainage underlying the rule of capture, (2) production from multiple drillsite tracts is involved, and (3) the fractures contributing to production are not all adjacent to any single drillsite.

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Failure of Title

Medusa Unit 839 Acres Luecke Tracts 268 acres 31% Drillsite Tracts 83 ac 10% Required 60% Hayes Unit 346 Acres Luecke Tracts 114 acres 32% Required 60%

Browning Case

Luecke Luecke

Luecke Luecke

● Wellbore

Hays Drillsite

● Wellbore

Medusa Drillsite

Luecke Luecke

■ Browning ■ Court considered:

■ (1) Lessees not allowed to ignore anti-dilution provisions with impunity, and (2) Immense benefits of horizontal drilling, including the reduction of waste and the more efficient recovery of hydrocarbons: ■ "Draconian punitive damages for a lessee’s failure to

comply with applicable pooling provisions could result in the curtailment of horizontal drilling. We decline to apply legal principles appropriate to vertical wells that are so blatantly inappropriate to horizontal wells and would discourage the use of this promising technology. The better remedy is to allow the offended lessors to recover royalties as specified in the lease, compelling a determination of what production can be attributed to their tracts with reasonable probability. "

Failure of Title

■ Browning ■ Court: ■ Remanded for determination of damages.

■ Result in Browning may limit the damages

caused by a failure of title in JOA context, question is whether any payments to the Lueckes, above what they would have received under the unit allocation formula ■ Charged to joint account or to party who

contributed the lease ■ Is it a failed lease; is it a title defect?

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Failure of Title

Failure of Title ■ What if Operator contributed the failed lease? ■ Recent opinion casts doubt on whether operator will be

treated in the same way as any other WIO: ■ Reeder v. Wood County Energy, LLC, p. 30

■ Reeder, an individual, operator under 1989 form of JOA.

■ Wells covered by JOA needed expensive repairs but the WIOs refused to pay.

■ Reeder spent own money to preserve wells but RRC suspended production from the wells.

■ WIOs sued Reeder for damages for failing to maintain production in paying quantities, for lost leases and loss of the unit.

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Failure of Title ■ Operator contributed the leases. ■ Reeder case.

■ Clause at issue: Article V.A., l. 11-13: ■ "Operator shall conduct its activities under this agreement

as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except as may result from gross negligence or willful misconduct."

■ Clause in 1982 and earlier JOAs: ■ "It shall conduct all such operations in a good and

workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.

■ Compare underlines.

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Failure of Title ■ Reeder case. ■ Texas Supreme Court

■ Held: change broadened the protection of operators and exempts the operator from liability for its activities unless its liability-causing conduct is due to gross negligence or willful misconduct.

■ Court did not define "activities." ■ Title failure on lease may not make the operator

liable to "bear alone the entire loss." ■ Can revise exclulpatory clause: Provided, however, that the foregoing limitation of liability

shall apply only to a breach of the duties set out in the preceding sentence and shall not apply to any other claims between Operator and the Non-Operators for breach of this Agreement or any provisions of any exhibit to this Agreement.

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■ Seagull case ■ Seagull -- Operator. ■ Eland former WIO ■ Offshore lease

■ Eland assigned all interest in lease – shortly before plugging and abandonment costs were to be incurred. Eland’s assignee declared bankruptcy. Operator sued. Texas Supreme Court held that JOA language on transfer not enough to release party from obligations incurred after assignment.

■ All WIOs who assign all interest in leases subject to JOA remain liable for future costs incurred unless get a specific release.

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Transfer of Interest

Transfer of Interest ■ Seagull v. Eland ■ The JOA at issue was a customized offshore

JOA. After examining various provisions, the court

concluded that "Nowhere do they mention the subject of release or the consequences which are to follow the assignment of a working interest. These subjects are, however, mentioned elsewhere in the agreement…" and "The operating agreement simply does not explain the consequences of an assignment of a working interest to a third party."

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Transfer of Interest Seagull case. 1989 JOA Language in Article VIII.D.: Every sale, encumbrance, transfer or other disposition made by any party

shall be made expressly subject to this agreement and shall be made without prejudice to the right of the other parties, and any transferee of an ownership interest in any Oil and Gas Lease or Interest shall be deemed a party to this agreement as to the interest conveyed from and after the effective date of the transfer of ownership; provided, however, that the other parties shall not be required to recognize any such sale, encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security interest granted by Article VII.B. shall continue to burden the interest transferred to secure payment of any such obligations."

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Transfer of Interest ■ Seagull case.

■ No express release language. ■ But, language in last 7 lines say transferor liable for post-

transfer costs if transferor consented to such costs. Implies not liable for any liabilities to which it did not consent.

■ Need to add express release language as to future obligations incurred but preserve liability for prior obligations.

■ Possible language: ■ A sale of all (or a proportionate part) of one party’s interest in

the Contract Area acts as a release of any claims, obligations or liabilities accruing after the effective date of the sale except as to any interest retained by the assigning party and except as to liabilites agreed to by the selling party prior to the transfer.

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Transfer of Interest ■ Indian Oil v. Bishop, p. 34

■ 1989 Form; Bishop operator, Trotter WIO. ■ Trotter assigned to Indian Oil in 2002; informed

operator. ■ Indian failed to pay workover AFE’s in 2007. ■ Court found for Indian and distinguished Seagull

because of the above language in the JOA. ■ Trotter not liable for 2007 AFE. ■ Trotter liable for P&A because Trotter admitted P&A

liability.

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Maintenance of Uniform Interests ■ “For the purpose of maintaining uniformity of

ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production covered by this agreement no party shall sell, encumber, transfer or make other disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests embraced within the Contract Area or in wells, equipment and production unless such disposition covers either: ■ 1. the entire interest of the party in all Oil and Gas Leases,

Oil and Gas Interests, wells, equipment and production; or ■ 2. an equal undivided percent of the party’s present

interest in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in the Contract Area.”

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Maintenance of Uniform Interests ■ Lack of specific remedies in JOA for

violation of UMI requirement. ■ Must show damages. ■ Valence case, p. 36

■ Exxon farmed out in violation of the UMI. ■ Valence put to a non-consent election by farmee

when zones could have been reached from existing wells.

■ Exxon found liable for non-consent penalty that Valence suffered.

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Preferential Purchase Rights. ■ Clause is optional and most, but not all

parties delete it, p. 38. ■ What interests are covered?

■ Case law applied provision to ORRI. ■ Clause specifically excludes transfer to sub or

majority owned company. ■ But if used as a device to avoid pref right, what

then? ■ Example: create sub and transfer ½ interest

to sub then sell sub to 3rd party.

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Preferential Purchase Rights. ■ Package sales ■ Offers to purchase are rarely limited to a single

JOA. ■ Case law (Texas):

■ Properties must be offered even if the package includes properties not subject to the pref rights.

■ Holder of the pref right not required to accept other interests in order to exercise pref right (not a JOA case).

■ Pref right holder must give selling party its intent to exercise subject to objection to the inclusion of other properties.

46

Preferential Purchase Rights. ■ Navasota v. First Source

■ 1989 JOA included pref right. ■ First Source parent signed LOI with CHK requiring

CHI to purchase 20% of parent’s stock, 1/3 of First Source’s WI, and AMI covering 13 counties.

■ Notice by First Source did not include all terms; just 1/3 of WI at $700/ac and CHK pay 1/3 for ¼ for 44% of 6 Bossier wells.

■ Navasota accepted. ■ Two hours later, First Source withdrew.

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Preferential Purchase Rights ■ First Source told Navasota it would have to pay for

stock, enter into AMI, etc. ■ Held

■ Texas follows rule that pref right is triggered when tract is included in a package of properties.

■ First Source could not require purchase of common stock or enter into large AMI in order to invoke.

■ When Navasota accepted First Source notice, became a binding contract.

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© 2015 Locke Lord LLP

The JOA As A Title Document

H. Martin Gibson Locke Lord LLP 600 Congress Avenue Suite 2200 Austin, Texas 78701 D + 1 512 305 4743 Mgibson@Lockelord.com