The joint operating agreement (“JOA”) is the most commonly used instrument in the oil and gas industry, surpassed only by the oil and gas lease. In essence, a JOA provides the contractual basis for the cooperative exploration, development, and production of oil and gas properties among multiple leasehold cotenants.
By and large, the most commonly used JOA form for Texas on-shore operations is the “Form 610,” curated and published by the American Association of Professional Landmen (“AAPL”). Several other JOA forms have been adopted by the oil and gas industry for other contexts, such as federal leases, offshore properties, and other countries. (e.g., (1) the Model Form of Offshore Operating Agreement AAPL Model Form 710-2002, and Model Form of Offshore Deepwater Operating Agreement AAPL-810 (2007), both designed for offshore oil and gas operations, (2) the Rocky Mountain Mineral Law Foundation Rocky Mountain Unit Operating Agreement Form 2 – Divided Interest, designed for use in Federal Exploratory Units, and The American Petroleum Institute Forms, which are generally used for enhanced recovery operations as to fieldwide units).
In this multi-part series, we will explore many areas of JOAs, from basic to advanced. In this first article, we will take a look at the basic purpose and function of a JOA.
The Fractionalized Nature of Leasehold Ownership
Typically, the fee oil and gas estate is owned in several undivided fractional shares. These owners then execute oil and gas leases to multiple lessees, who then own the associated leasehold estate in undivided fractional shares. These lessees then often assign undivided fractional shares of those oil and gas leases to third parties. The result is that any given oil and gas property is typically concurrently owned by numerous cotenants. The parties may hold leases that cover various undivided interests in a single tract of land, or they may own leasehold interests in nearby tracts of land and wish to pool their interests together in order to drill a well.
The Rights of Leasehold Cotenants Without a JOA
What rights and obligations do these cotenants owe one another in their exploration and development activities? In Texas, any of the cotenants may generally drill for and produce oil and gas without the consent of the other cotenants. However, when one covenant proceeds alone, they generally bear the entire dry-hole risk, but if the endeavor achieves production over the development costs then they still must account to the other cotenants for their proportionate share of production (less only their proportionate share of the cost of drilling for, producing and operating the property).
One commentator fittingly dubbed this the “Cotenant Problem.” A joint operating agreement can solve this “cotenant problem,” and provide a contractual basis for parties to understand their rights and obligations.
2023/2024 Update: Recent cases have further suggested that, without a JOA, a non-operating covenant may not be able to rely on production to perpetuate their oil and gas leases. Some have referred to this risk as the "Anadarko Washout." For example, see Logan Jones' recent article "A New Type of Washout."
There are numerous other benefits and protections to be gained by operators and non-operators alike through entering into a JOA, but that will need to be the topic of future articles.
Facilitating Joint Operations
Of course, leasehold cotenants do not always have competing interests. In fact, they often have shared or overlapping goals in terms of sharing in the costs, risks, and benefits of jointly exploring, developing, and producing oil and gas properties. Multiple oil and gas companies may find themselves in a leasehold cotenancy relationship with shared goals after separately acquiring oil and gas leases covering different divided or undivided interests in a given area. Or they may intentionally place themselves in a leasehold cotenancy relationship by an original lessee selling partial undivided interests to other oil and gas companies, or through entering into farm out agreements, participation agreements, joint development agreements, etc.
However the lessees became leasehold cotenants, they will often enter into a joint operating agreement (JOA) in order to establish a contractual framework for cooperatively developing and producing the assets within their contract area.
Under a JOA, the leasehold cotenants appoint one party as “operator,” who is then has full control of conducting and directing all operations within the contract area, under the confines of the JOA. (Form 610-1989, Article V.) The remaining cotenants are then considered “non-operators,” who only retain indirect control of the operations in the contract area, such as voting on subsequent operations, electing whether to consent to subsequent operations, and certain inspection rights. (See, e.g., Form 610-1989, Article VI.B.)
JOA forms generally endeavor to facilitate a number of other critical aspects of that relationship, such as:
- allocating risks, liabilities, revenues, and ownership
- appointing an initial operator, addressing future operatorship issues, and selection of successor operator
- establishing accounting procedures
- defining standards of operatorship, but also relieving the operator of many liabilities unless caused by gross negligence or willful misconduct (the "exculpatory clause")
- mechanisms for making proposals for subsequent operations, handling partial participation in subsequent operations and so-called "non-consent penalties" to reward participation
- procedures for title examination and handling various types of potential title issues
- provisions for handling potential future acquisitions or dispositions within the contract area
- and many other potential matters...
Conclusion (and upcoming articles...)
This article is the first in a multi-part series exploring the foundational aspects of joint operating agreements (JOAs) in the oil and gas industry. In this introductory piece, we’ve reviewed the basic purpose and structure of JOAs, focusing on how they address the unique challenges of leasehold cotenancy and provide a contractual basis for cooperation. In the coming articles, we’ll dive deeper into specific provisions, industry nuances, and recent legal developments impacting JOAs. Stay tuned as we continue to unpack this critical tool for joint exploration and development in the oil and gas sector.
