The New 2015 Form Operating Agreement- A Brief Overview

The AAPL officially released its Form 610 – 2015 Model Form Operating Agreement (the “2015 JOA”) to the public last month via its proprietary online Contract Center.  Intended to be a comprehensive update to address the realities of horizontal drilling, the 2015 JOA contains new and revised: definitions, well proposal and elections provisions, expanded forms of notice (i.e., email), among numerous other changes.  Nevertheless, many of the form revisions contained in the new 2015 JOA will appear familiar to domestic industry participants who have negotiated an operating agreement in recent years.  This is because most of the changes to the 2015 JOA echo the revisions and additions that had become market in shale-play operating agreements utilized in the Barnett, Haynesville, Eagle Ford, and Marcellus shales.An important departure from the horizontally-oriented revisions contained in the 2015 JOA is the form’s overhauled approach to the operator’s rights and duties in Article V.  These changes were prompted less by horizontal drilling practices than by state court rulings interpreting the applicability of the model form’s exculpatory clause.  In particular, Article V.A. of the 2015 JOA provides that an operator shall have no liability to the non-operators “for losses sustained or liabilities incurred in connection with authorized or approved operations under this agreement except as may result from gross negligence or willful misconduct.”  The addition of the italicized phrase is a direct response to the Texas Supreme Court’s ruling in Reeder v. Wood County,[1] which held that the exculpatory clause should be applied broadly to relieve an operator of liability (even for breach of the operating agreement), except in cases where the operator’s conduct was grossly negligent or willfully bad.  Arguably, the revision to this provision in the 2015 JOA is an expression of the spirit, if not the letter, of the reasonable operator protections contained in the AAPL’s previous model form operating agreements.  That is, the reasonably prudent operator is authorized to execute its duties without the unwarranted second-guessing of its non-operators, but that authority (and protection from liability) is not unlimited.Additional operator-related concepts include provisions for the engagement of a non-owning or contract operator pursuant to a discrete agreement (Art. V.A.).  The obligations of the non-owning operator will be according to the terms of the 2015 JOA, unless otherwise set forth in the separate contract operator agreement.  Further, the removal of a non-owning operator may be effected by majority ownership vote, without the requirement that good cause be shown (Art. V.B.5).  And, in the case of an operator who owns an interest in the Contract Area, Article V.B.2 of the 2015 JOA allows the parties to select a minimum ownership percentage; if an operator’s ownership interest falls below this minimum threshold, such operator will be deemed to have resigned its operatorship. The 2015 JOA contains additional operator-related revisions, the potential effects of which merit further analysis. We encourage the owners of working interests in oil and gas assets to seek competent legal counsel prior to executing a new 2015 JOA or any other form of operating agreement.[1] 395 S.W.3d 789 (Tex. 2013)Thompson & Knight LLPRichard Hemingway and David Cias