Protecting Your Company in a Downturn Using Agreements You Already Have in Place

Whether you have been in the oil and gas industry for ten months or ten years, you know the highs eventually turn to lows. As commodity prices begin to fall and the uncertainty of what tomorrow may bring unfolds, our clients find themselves searching in “one of those contracts” they signed years ago to find the answer to their company’s viability. Often, the first contract they turn to is their Joint Operating Agreement (“JOA”). JOAs present a credit risk for both operators and non-operators alike. With advance payments by operators on behalf of non-operators, and the operator’s ability to receive proceeds from hydrocarbons for the non-operators, each party is left with the concern of never seeing money they are owed.

One way JOAs seek to mitigate this risk is in Section VII.B (A.A.P.L. JOA Form 610-1989 (the “Model Form JOA”)), which grants a reciprocal contractual lien and security interest in both current and future acquired real property located within the “Contract Area,” and in fixtures related to the real property. However, the right to file a lien is only the beginning. Have you actually perfected your lien? Are you sure? Without a perfected lien properly filed at the state and county levels, you are merely an unsecured creditor; if the owing party has filed for bankruptcy…good luck.

In addition to contractual lien rights, JOAs should also protect your interest by including commodity price adjustment mechanisms, hedging, and risk management strategies, performance guarantees or bonds, and notice obligations. While the Model Form JOA provides many advantages to establish market rights and obligations of the parties, many of these protections should be specifically negotiated in Article XVI, which allows the parties to include terms specific to their operations. Clear and specific rights and obligations of the parties can help avoid future disputes.

Whether you are just starting to negotiate a JOA or digging up a signed JOA from years past, the attorneys at RR&A are only one call away to secure and protect your interests.

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Disclaimer: The information and material on this website is general information about our practice and firm. This information does not offer specific legal advice and the use of this information does not create an attorney-client relationship with RR&A or any of its attorneys. The information on this website should not be used for legal advice, and persons should not act upon the information on this website without engaging professional legal counsel.

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