Simulación de Monte Carlo

The length of the election period given to the non-operator often depends on whether a rig is on site to conduct the operation or not. Some opportunities will not last until the end of the election period and the operator may want to immediately start drilling activities. However, determining exactly when an operator can begin work that requires consent elections by the other party is difficult using the Form JOAs. For example, Article VI.B of the 1977 Form does not make absolutely clear that the operator can commence work immediately instead of waiting until the end of the election period.

Problem: Orr Operating, operator under a 1977 Form, sent out notices and a request for consent regarding a proposal to drill a well. The JOA required a thirty-day notice period for proposed subsequent operations under Article VI.B Two days after sending out the notices, Orr Operating started drilling. A non-operator, Ocasec Oil, challenged the drilling, arguing that the consent period, as defined in the JOA, had to run before operations for the proposed operation can begin. Is Ocasec Oil correct?

In Valance Operating Company v. Elmagene W. Dorsett,82 Operator Valence gave non-operator Dorsett written notice of its intent to drill eight wells from 1996 to 2001. Dorsett received the notices but did not consent to the drilling of any of the wells and did not contribute to the drilling costs. In each case, Valence had begun site work—and in a couple of cases actual drilling operations—before thirty days had elapsed after Dorsett’s receipt of the consent notice. Valence imposed the non-consent penalty described in Article VI.B.2 and Dorsett sued. The Texas Supreme Court held that, since the relevant non-consent penalties were enforceable and nothing was

81. French v. Joseph E. Seagram & Sons, Inc., 439 S.W.2d 448 (Tex. Civ. App—El Paso 1969, writ ref’d n.r.e.).

expressed in the JOA to the contrary, the operator could immediately begin work on a proposed operation before expiration of the notice period.

To avoid such litigious delay and cost, a custom clause may be considered deciding whether or not the operator has the latitude to commence operations immediately. If so, the non-consent penalties should be expressly enforceable notwithstanding the commencement of operations prior to the expiration of the election period.

Questions also exist about how to order follow up operations once the initial target is reached. Parties to the JOA may have different priorities about the next step—whether to deepen or plugback, recomplete an existing payzone, or send out a lateral—and choosing one may foreclose the opportunity to do another. Parties may want to consider adding a custom provision that establishes a priority among various operations that might be proposed once the target formation or depth is achieved.

Problem: Emmett Oil, as operator, executed a 1989 Form along with Moore Gas and Levine Production, both as non-operators, which included the following clause regarding subsequent operations in Article VI.B.1:

Proposed Operations: If any party hereto should desire to drill any well on the Contract Area other than the Initial Well, or if any party should desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no longer capable of producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under this agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a well shall give written notice of the proposed operation to the parties who have not otherwise relinquished their interest in such objective Zone under this agreement and to all other parties in the case of a proposal for Sidetracking or Deepening, specifying the work to be performed, the location, proposed depth, objective Zone and the estimated cost of the operation. The parties to whom such a notice is delivered shall have thirty (30) days after receipt of the notice within which to notify the party proposing to do the work whether they elect to participate in the cost of the proposed operation. Failure of a party to whom such notice is delivered to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.

The Initial Well was drilled and completed. Emmett Oil sent the non- operators a certified letter proposing subsequent operations. Specifically, Emmett Oil proposed to drill and operate a second well. Moore Gas did not respond to this proposal within the thirty day window but did send Emmett Oil a proposal that Moore Gas would drill and operate the second well within the thirty day window. Emmett Oil filed an action requesting the court to declare it the operator of the proposed well. Who is the operator now?

In Nearburg v. Yates Petroleum Corp.,83 Nearburg sent Yates a certified letter proposing to drill an additional well in accordance with the terms of Article VI.B in the 1977 Form to which they were both signatories. Yates received this letter on Dec. 1, 1994 but failed to respond within thirty days. Yates did, however, send Nearburg a letter dated Jan. 11, 1995, stating that Yates proposed to drill the same well. On Dec. 29, 1994, Yates had also obtained a permit to allow it, as operator, to drill the same well. Nearburg filed a complaint alleging that Yates’ actions violated Nearburg’s rights under the JOA and prevented Nearburg from obtaining a drilling permit for the subsequent well. Nearburg sought to be named operator of the subsequent well. In response, Yates asserted that an election not to participate (i.e. Yates non-response non-consent to Nearburg’s notice of Dec. 1, 1994) constituted an offer to relinquish the party’s interest in production from a proposed operation, and that this offer could be accepted by the proposing party (i.e. Nearburg) by “actually commencing work” within sixty days of the end of the election period, as described in Article VI.B.2. Therefore, until Nearburg, the proposing party, accepted performance by drilling, Yates had the right to change its election by withdrawing its offer, meaning it terminated its offer to relinquish its interest by its Jan. 11, 1995 letter communicating its intent to participate in the drilling of the subsequent well.84

The Court of Appeals in New Mexico found this interpretation “strained” and held that the party that initially proposed a subsequent well under the terms of the JOA (i.e. Nearburg) became the operator of that well and that Yates’ election not to participate in drilling was not an “offer” that could be withdrawn before the proposing party signified its “acceptance” by commencing work on proposed operation. Practically speaking, this interpretation of the non-consent penalty provisions in the 1977 Form meant the non-consent provisions acted as a covenant (to pay the penalty)

83. 943 P.2d 560 (N.M. App. 1997).

triggered by a condition precedent (either failing to elect to join—a default non-consent under most JOAs—or an actual election not to join) instead of a contract option. In deciding, the court reasoned, “The operating agreement provisions are clear. Failure to elect to participate within thirty days of receiving notice of a proposed operation constitutes an election not to participate. When this condition occurs, the non-consent penalty results.”85