Subsequently Created Interests and the Division Order Analyst

Transcription

1 Subsequently Created Interests and the Division Order Analyst Doug Potter, CDOA Nancy McDonald, CPL ARTICLE II. EXHIBITS A. Exhibit "A," shall include the following information: (1) Description of lands subject to this agreement, (2) Restrictions, if any, as to depths, formations, or substances, (3) Parties to agreement with addresses and telephone numbers for notice purposes, (4) Percentages or fractional interests of parties to this agreement, (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement, (6) Burdens on production. Subsequently Created Interests and the Division Order Analyst Page 1 of 9

2 JOAs WITH SUBSEQUENTLY CREATED INTEREST CLAUSES ARTICLE III.C. SUBSEQUENTLY CREATED INTERESTS (a) 1956 Form (i) There is no SCI provision (b) 1977 Form (i) Only burdens created after the effective date are SCI (c) 1982 Form (i) Burdens created after the effective date (ii) Burdens created prior to the effective date are SCI unless: 1. reflected on Exhibit A 2. disclosed in writing prior to execution 3. jointly acknowledged and accepted (d) 1989 Form (i) Burdens created after the effective date (ii) Burdens created prior to the effective date are SCI unless reflected on Exhibit A Subsequently Created Interests and the Division Order Analyst Page 2 of 9

3 Sally and Charlie, sister and brother, each own an undivided ½ mineral interest in a tract of land. *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** * Dynasty and Dallas sign a 1989 AAPL JOA Dynasty is Operator. 300% non-consent penalty. Contract Acreage = all of the land owned by Sally & Charlie *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** * Subsequently Created Interests and the Division Order Analyst Page 3 of 9

4 Hmmm Did anyone think that this new ORRI could be a Subsequently Created Interest? Subsequently Created Interests and the Division Order Analyst Page 4 of 9

5 OR Subsequently Created Interests and the Division Order Analyst Page 5 of 9

6 ARTICLE III. INTERESTS OF PARTIES C. Subsequently Created Interests: Further, if any party has contributed hereto a Lease or Interest burdened with an overriding royalty, production payment, net profits interests, or other burden payable out of production created prior to the date of this agreement, and such burden is not shown on Exhibit "A," such burden also shall be deemed a Subsequently Created Interest to the extent such burden causes the burdens on such party's Lease or Interest to exceed the amount stipulated in Article III.B. above. 5/1/2013 Asmt of ORRI from XYZ to Delta affecting Lease #1 SCI Yes No YES, to the extent it exceeds the amount stipulated in Article III.B. Subsequently Created Interests and the Division Order Analyst Page 6 of 9

7 Subsequently Created Interests and the Division Order Analyst Page 7 of 9

8 ISSUES TO NOODLE. Situation #1: Party A sells to Party B, reserving an ORR. This is a SCI as Party A executed the JOA. Party A had agreed to participate in the well (executed JOA, AFE, etc.) Party B does not pay JIBS after well is drilled and completed; owes $$$ on the wells. Decision: Operator goes back and places Party B s interest in a non-consent position (200% or 300% penalty per terms of JOA) Operator can institute the SCI and NOT pay the ORR to Party A. This ORR is supposed to come out of Party B s working interest. Under the JOA it is NOT paid to Party A while Party B is in a NC position. Can you do this? Look at Article VI.2.B.d. Situation #1 cont d: What does Article III.C say? What does it mean? Operator does not pay the ORR while the party is in a non-consent position. How do Division Order folks handle this? They do NOT pay the ORR payable until after payout. SOX JOA governs, not title. As Operator you claim this clause Article III C. with Article VI 2.B.d. of the JOA. Subsequently Created Interests and the Division Order Analyst Page 8 of 9

9 Situation #2: Party A sells to Party B, reserving an ORR. This is a SCI as there was an executed JOA between Operator and Party A. However, Party A owes Operator $$$ on wells prior to the effective date of the sale to Party B. The Party B did not agree to assume the debt of Party A in their PSA/ABS. Decision: Operator is already holding back $$ from Party A (netting) as Party A is not paying JIBs to Operator on wells prior to the effective date. Operator has placed Party A in a non-consent position (300% penalty) where it is possible to cover all capital D&C costs. (LOE are 100% so out of luck.) You can decide to suspend ORR $$ from Party A. Also, if there are other revenues on other lands you can make the call re netting those $$ against the $$ owed to Operator. Conundrum: If Operator pays Party B gross $$ so they can pay Party A the ORR, there is no possible recoupment of Party A s debt. However, this is a SCI and you have the right to not pay burdens of non-operators. What to do???? In this case I would not use the SCI, and hold back the ORR payments on Party A. Seek legal counsel. *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** * There are many sources of information pertaining to Subsequently Created Interests. One of the many sources that was particularly interesting to the presenters is listed below. The JOA As A Title Document May 2-3, 2013 Authors : H. Martin Gibson / Jason A. Schumacher Dentons US LLP 2000 McKinney Avenue, Suite 1900 Dallas, Texas *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** *** ** * This presentation is designed to provide information with the understanding that the presenters and the Denver Association of Division Order Analysts, their members, associates, employer(s), employee(s), representatives and all other entities are not engaged in rendering legal, accounting or other professional services. Prior to actual application of any concept, theory or calculation presented herein, the consultation and assistance of a competent professional should be sought. All entities make NO warranty or representations and assume NO responsibility or liability as to the usefulness, reliability, correctness and/or acceptability of the information, ideas, concepts formulas and/or interpretations of the written/oral material presented herein. Anyone relying upon the statements, contents and/or comments found in this book and/or presented during the associated event agrees to do so at his/her own cost, risk and expense and agrees to indemnify the presenters and all other entities. Although this was a team presentation, the presenters may differ as to their perspectives on particular methods to analyze and resolve issues associated with Subsequently Created Interests. Subsequently Created Interests and the Division Order Analyst Page 9 of 9