Joint Operating Agreements: An IntroductionApril 19, 2016
Other than oil and gas leases, joint operating agreements are the most popular and influential instrument in the oil and gas industry. With a joint operating agreement (JOA) in place, multiple leaseholding cotenants can lay a contractual foundation for any cooperative development, exploration, or production of oil and gas from a site.
The most basic and common type of JOA, used primarily for domestic onshore gas and oil production, is known as Form 610. However, several different forms exist to deal with unique circumstances that can arise. Three key examples are:
- Form 710 (2002), the Model Form of Offshore Operating Agreement
- Form 810 (2007), the Model Form of Offshore Deepwater Operating Agreement
- Form 2, the Rocky Mountain Unit Operating Agreement
Basic Function and Purpose of JOAs
Most oil and gas estates are comprised of fractional shares. The owner of the shares usually offers oil and gas leases to a variety of lessees. Those lessees may ultimately choose to break up their share into smaller fractional shares and offer them to a variety of third parties. Through this process, properties can end up with many parties holding lease agreements within the same tract of land. Sometimes these parties decide to pool their interests to drill, develop, or explore. JOAs provide the contractual basis for doing so.
The “Cotenant Issue”
In some states, cotenants can produce and drill for oil without obtaining consent from any of the cotenants that share the same tract of land. However, when proceeding without consent, the drilling or producing cotenant must take on the entirety of the risk for dry holes. They must also share their production, less the costs of drilling, with any cotenants.
JOAs can solve potential issues arising between operating and non-operating cotenants by formalizing each party’s obligations and rights in a contractual agreement.
Lessees on the same tract of land don’t always have competing interests. Working with cotenants can help facilitate development and exploration, spread risk, and raise capital.
Even in cases of aligned interests, JOAs can provide structure to complex agreements that may otherwise contend with unanticipated differences and disputes.
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