AAPL Deepwater Operating Agreement: Who Needs It?
Barbara J. Bordelon, Esq.
Ronald L. Moore, P.C.
5900 Fairdale
Houston, Texas 77057
Telephone: (713) 266-4433
Facsimile: (713) 266-8282
bjb@lawyer.com
Petroleum Landmen’s Association of New Orleans
Executive Night Seminar
February 7, 2002
OUTLINE
I. INTRODUCTION
II. GLOBAL COMMENTS
A. Size and Structure
B. Drafting and Style
III. WHO=S USING THE MODEL FORM
A. Move to the Model Form
B. General Rule
C. Cut-and-Paste Approach
D. Survey Results
E. General Matters Form
IV. MAJOR DIFFERENCES
A. Definitions
B. Contract Area and Prospect Area
C. Votes and Elections
D. Development Systems, Production Systems and Facilities
G. Overinvestments and Underinvestments
H. Choice of Law
V. SUMMARY
1. INTRODUCTION
The last decade has seen an explosion in deepwater activity in the Gulf of America, and as activities moved farther from the shore, operations became more expensive and longer in duration, and the old forms of operating agreement became increasingly unsuitable. In 1996 the American Association of Professional Landmen (AAPL) responded to the industry need for a common form of deepwater joint operating agreement (JOA) by commissioning its OCS committee with the task of preparing just such a form. The OCS committee worked with sixteen different company JOA forms for four years and as of August 8, 2000, the AAPL promulgated the AAPL Model Form of Offshore Deepwater Operating Agreement, commonly known as the AAPL-810 (2000), which I will refer to in this presentation as the “Model Form.” This presentation is to review its first year and a half of use.
2. GLOBAL COMMENTS
A. Size and Structure
The Model Form is 127 pages long. It is a complex document, addressing most of the situations that are likely to come up in the course of deepwater operations. And for many of those situations, it provides multiple solutions. There are 134 blanks or boxes to fill in. The range of choices running through the agreement evidences the need to accommodate the many different fact situations; it also evidences some strong philosophical differences of opinion on how some questions are to be resolved.
I was advised by members on the OCS committee that one of the philosophical differences within the committee was the issue of whether an election not to participate in the first exploratory well should carry a high percentage penalty or a forfeiture of all rights. Three members of the OCS Committee (Bill Moore, Lannie Yeates and Tom Jorden) did a presentation on the Model Form at the 1999 Energy Law Institute in Houston, and in their paper they made the comment that the OCS Committee was almost evenly split between those who wanted forfeiture and those who wanted a high percentage penalty. My survey found no such split. Of the seventeen companies I interviewed, not a single one of them selects a high percentage penalty, all went with forfeiture as the penalty. I can certainly see circumstances under which the parties might opt for a percentage penalty, but the industry does seem to be sticking to the general rule that an election not to participate in the first exploratory well will result in a forfeiture.
B. Drafting and Style
One last general comment on the Model Form. When the AAPL OCS Committee finished the substantive work on the form, they scrubbed it down for grammar and style. Gone is a lot of the old school, stilted language and contorted sentence structure. It is a vastly improved document. My only complaint is that they did not go far enough. This is particularly important for “living” agreements (i.e., agreements for ongoing activities, and continually referred to). This exercise improves clarity, reduces ambiguity, and reduces time in interpretation and in understanding. Often a clear bad answer is better than an ambiguous good one. I am continually shocked at the amount of bad grammar running through our industry agreements. There really is a proper way to use of the terms “which” and “that”, and very few people seem to know the difference.
Let me cite one example of what good drafting can do. Let’s review the term “Affiliate.” Here is the definition that appears in most of the JOAs I reviewed:
Affiliate
Shall mean any corporation, limited liability company or partnership (including a limited partnership) or other entity owned or controlled by a Party to this Agreement. The term “Affiliate” of a Party includes any parent corporation, partnership or other entity that directly or indirectly owns or controls fifty percent (50%) or more of the outstanding stock (or other interests) having the right to vote for directors of a Party to this Agreement, and also includes any other corporation, partnership or other entity in which the parent corporation directly or indirectly owns or controls fifty percent (50%) of the voting stock (or other interests) in the other corporation.
_ Ownership or control by a Party is deemed to exist if a Party to this Agreement directly or indirectly owns or controls fifty percent (50%) or more of the outstanding stock of the corporation having the right to vote for directors of the corporation [or fifty percent (50%) or more of the interests in the partnership or other entity].
_ The stock (or interests in a partnership or other entity) owned or controlled by a Party shall include all stock (or other interests) directly or indirectly owned or controlled by any other corporation, partnership or other entity owned or controlled by a Party to this Agreement.
And here is the definition in the Model Form:
Affiliate
A corporation, company, limited liability company, partnership, or other legal entity that:
(a) is owned or controlled by a Party,
(b) is owned or controlled by another corporation, company, limited liability company, partnership, or other legal entity that is owned or controlled by a Party,
(c) owns or controls a Party, or
(d) is owned or controlled by a corporation, company, limited liability company, partnership, or other legal entity that owns or controls a Party.
For the purposes of this definition, ownership or control means the ownership, directly or indirectly, of fifty percent (50%) or more of the shares, voting rights, or interest in a corporation, company, limited liability company, partnership, or other legal entity.
The Model Form is the same definition, just more clearly stated. This kind of improvement is evident throughout the Model Form. Note the use of the word “that” in the first line of the definition rather than the erroneous but more often seen “which.” Note too the dropping of the awkward and unnecessary “shall mean.”
3. WHO’S USING THE MODEL FORM
The committee for the 2000 Energy Law Institute asked me to do a survey of the deepwater operators to see who is using the Model Form and how. I interviewed seventeen companies, nearly all of the big players, and reviewed most of their “standard” forms of deepwater operating agreement.
Let me give you my conclusions upfront, and talk about the details later.
A. Move to the Model Form
Deepwater operators who are not using the Model Form, or very little of it, should nevertheless get well acquainted with the Model Form. The Model Form is creeping more and more into the industry JOAs. The industry is moving much faster toward the adoption of this form than it generally does at the introduction of a new form. Nearly every company that I talked to - with perhaps the sole exception of BP Amoco - said that its form was in the process of being significantly revised. While we (including BP Amoco) all agree that a form should always be a work-in-progress, the amount of revision going on with these forms is due in large part to the promulgation of the Model Form. Huge portions of the Model Form are seen in most of the forms I reviewed.
B. General Rule
As a general rule - though there are a number of exceptions - the larger the company, the more likely it is to be using the Model Form or large portions of it. There are a number of reasons for that. The larger companies are more active in the deepwater, and have been for longer periods, so they have been working with these concepts and agreements longer and have completed the move away from the shelf form. Another reason is they also have the manpower to dedicate to the total revision of the company form. Overhauling a deepwater JOA is a time consuming project, and most companies do not have a landman they can dedicate to that process for the months it takes to do it properly. Furthermore, the larger companies were more likely to have had representation on the OCS committee for drafting the Model Form and therefore more familiar with it early on. Again that is due partly to availability of manpower.
C. Cut-and-Paste Approach
The companies who do not have these advantages end up using their old forms and revamping them one step at a time, often lifting whole sections of the Model Form for incorporation. The “cut-and-paste” method is a dangerous approach. One company apparently liked the Model Form’s section on contributions (Section 23) and lifted it word for word. But the section contained certain defined terms that were defined differently in the Model Form or did not appear at all in the company’s form, so the incorporation of the section did not work very well. I have spent a lot of time in the last few years looking at deepwater JOAs and the cut-and-paste approach can create its own set of problems unless done with very careful consideration.
Now, let’s take a look at some of details of the results of my survey.
D. Survey Results
Of the seventeen companies interviewed, only one used none or so little of the Model Form that I classify it as not using the Model Form. Five of the interviewed companies are using the Model Form as their base agreement, i.e., the one from which they began the process of customizing and making the many choices embedded within the form. The rest of the interviewed companies are using what I call the “General Matters” form, then doing a cut-and-paste of various provisions from the Model Form.
E. The General Matters Form
The “General Matters” form defines a General Matter as “any matter decided by a vote of the Parties in accordance with Article 8.2 (Voting Procedures on General Matters and Elections). A proposal as a General Matter may or may not include an AFE depending on the type of proposal. If the nature of the proposal requires that an AFE be submitted with the proposal, an affirmative vote for such proposal shall be evidenced by a Party’s execution of the AFE for the proposal.” Aside from being an abomination of writing, this provision is confusing when considered with the definition and treatment of “Elections.” More on that later.
4. MAJOR DIFFERENCES
Given the popularity of the General Matters form, it is worthwhile to compare the more important elements of the Model Form to the General Matters form.
A. Definitions
The Model Form has improved the treatment of definitions. A good example of that is the term “Affiliate,” discussed above. And the Model Form has tightened up the definitions so that some of the old ambiguities are eliminated.
However, the definitions section in the Model Form still has some problems. For one thing, there are too many of them. Do we really need definitions like “Underinvested Party - A Party with an Underinvestment”? Many of the definitions are awkward, even troublesome. The term “Exploratory Operation” is defined as any operation conducted under Article 10, then Article 10 says any party may propose an Exploratory Operation. It’s a circle, and too many of the definitions do that.
A lot of the General Matters forms say that the terms “Appraisal Operations” and “Appraisal Wells” can be used interchangeably. First, they don’t really mean that. When you read the agreement, the terms cannot be, and indeed are not, used interchangeably. Second, if they were interchangeable, one of them should be dropped.
B. Contract Area and Prospect Area
The Model Form departs from some of the old style operating agreements (including most of the General Matters forms) in the treatment of the description of the physical area subject to the agreement. The API Model Form, which is the genesis of most of the shelf operating agreement forms, provides that the agreement applies separately to each lease described on Exhibit A. This idea was picked up in many of the deepwater forms by providing for multiple Prospect Areas within one overreaching Contract Area, with each Prospect Area treated as subject to a “virtual” separate operating agreement. The Model Form did away with the Prospect Areas, and provides only for a Contract Area, even if multiple blocks and prospects are covered. This is a significant distinction. But given the time and dollars required for the development of deepwater prospects, keeping separate Prospect Areas (with separate JOAs) could create some tough results, the most notable of which is the application of the forfeiture penalty for electing not to participate in the first exploratory well on a separate Prospect Area.
Furthermore, allowing multiple Prospect Areas and JOAs within one Contract Area can create problems with some of the definitions and may interfere with the intentions of the parties. If the definitions of Exploratory Well and Exploratory Operations are not crafted to allow for multiple prospects under the agreement, the intended non-consent penalties may not apply.
C. Votes and Elections
The treatment of the voting and election process is the single most important difference between the Model Form and General Matters form. The Model Form is a vast improvement. The Model Form has done away entirely with the term General Matters. For the most part, matters in the General Matters forms that require approval as a General Matter are matters that require approval by vote in the Model Form. The Model Form then makes a clear and consistent distinction between matters that require approval by vote versus matters that require approval by election. Nearly all of the General Matters forms make a mess of the distinction between the voting matters versus the election matters.
The Model Form is set up to allow for two basic kinds of decisions: those requiring a high percentage participation before the action can be taken and carrying no penalty for non-participation, and those requiring a low percentage and carrying a percentage penalty for non-participation.
Let’s review the different kinds of matters and the approval procedures in the Model Form.
Attachment 1 is a schedule of Matters Requiring Approval by Vote.
Attachment 2 is a schedule of Matters Requiring Approval by Election.
Attachment 3 is a schedule of Matters Requiring Approval By Unanimous Consent
If you look at the schedule of Election matters, you see that they nearly all carry a percentage penalty. If you look at the schedule of Vote matters, you see that most of them do not.
Let’s look at the definitions in the Model Form.
2.56 Vote
As a noun, a response or deemed response by a Party to a proposal requiring approval under Article 8.2.1 (Approval by Vote); as a verb, to respond to a proposal requiring approval under Article 8.2.1 (Approval by Vote).
[8.2.1 Approval by Vote
Approval by Vote shall be decided by a Vote of the Parties as follows:
(a) when one Party or two Parties are entitled to Vote, approval by Vote shall require an affirmative Vote of one or more Parties with a Voting interest of ______ percent (____%) or more, or if two Parties entitled to Vote have the same Voting interest, the affirmative Vote of all Parties entitled to Vote; and
(b) when more than two Parties are entitled to Vote, approval by Vote shall require an affirmative Vote of _______ (__) or more Parties entitled to Vote with a combined Voting interest of _______ percent (__%) or more.]
2.21 Election, Elect, Elects, Elected, Electing
A response or deemed response by a Party to a proposal requiring approval under Article 8.2.2 (Approval by Election), or the act by a Party of responding to a proposal requiring approval under Article 8.2.2 (Approval by Election)
[8.2.2 Approval by Election
Approval by Election shall be decided by an affirmative Election by one or more Parties, entitled to make an Election, with a combined Electing interest of _______ percent (__%) or more.]
The idea is to put as low a percentage in Section 8.2.2 as is appropriate for one party to own before allowing it to proceed alone on a non-consent operation. What is the lowest working interest a party should own before it can drill alone? The OCS Committee said that the number probably ought to be at least 12.5%. By answering this question and putting that number in 8.2.2, it then does not matter what the working interest ownership distribution is as long as each has the minimum. That is generally what all the forms do with respect to wells; most parties want to be able to drill regardless of what the other parties want to do. To accomplish this, the General Matters forms require either inserting a number just below the smallest interest owner, or creating an exception to the voting formula for wells, which is a silly solution.
However, this situation (a small interest owner) may be one of the instances that prompted some members on the OCS committee to argue for a high percentage penalty rather than forfeiture for failure to participate in the first exploratory well. An over-50% interest owner would not want a 12.5% owner to be able to propose an ill-advised well and force the big-interest owner to participate or lose all rights. A high percentage penalty could protect both interests. The small interest owner could drill its well, and the big interest owner could sit out without losing all its rights. I’m not sure this would be acceptable where there are only two parties, one with a very small interest. A big interest owner is not likely to allow a very small interest owner many rights. And I’m not sure it would matter much anyway, at least on this point. A very small interest owner (say, less than 20%) is not likely to be drilling alone anyway, especially if the penalty for the big interest owner is a percentage penalty, not forfeiture. Furthermore, this issue is not a question of which form to use but what the parties negotiate.
I think the voting issue is the prime reason more companies have not switched to the Model Form. Cut-and-paste won’t work here. To make the change to the Voting and Elections approach in the Model Form would require so much change to the General Matters form as to constitute acceptance of virtually the entire Model Form. The General Matters forms have the same results for the most part but the process is often tortuous (and torturous).
D. Development Systems, Production Systems and Facilities
These terms do not usually generate controversy. The problem is in the definitions. Many agreements have these three definitions, with their uses all jumbled up. All three definitions are useful but they need to be used properly and separately.
E. Overinvestments and Underinvestments
This may be the most misunderstood and, if my survey is correct, the least used provisions in the operating agreement, regardless of which form is used. Attachment 4 lists the operations in the Model Form that can trigger an over- / underinvestment. Most of the other forms track fairly closely to this list. There really are not that many, and the only one that’s interesting is the Model Form Section 13.3.2 (Development Well Proposals That Include Drilling Below the Deepest Producible Reservoir), which is attached as Attachment 5.
I point out this section for discussion not because the various agreements differ in their treatment of non-participating parties but because some of the forms appear to use different approaches. The language is often (and unnecessarily) difficult to figure out.
The General Matters forms consistently provide that for single completions below the deepest Producible Reservoir, the parties participating only to the deepest Producible Reservoir are overinvested for their costs, presumably as of the date the deeper drilling commences, though that is not specified. But once the deeper operations are complete, and either the deep Participating Parties go back uphole or after payout (including penalty), then the deep Participating Parties become the overinvested parties. While not clear in the agreements, it is probably assumed that the Non-Participating Parties in the deeper operations (the overinvested parties) will start getting their money back as soon as deeper operations commence, through disproportionate spending by the underinvested parties, so that by the time the parties come back uphole and the shallow participants are again participating in operations, the shallow participants may not be overinvested anymore, which then makes the deep participants overinvested above the Deepest Producible Reservoir. So the parties have flipped in status.
But the Model Form approaches this problem differently. The over-/underinvestment status is not triggered at the date the deeper drilling begins (as with the General Matters forms) but only upon one of certain triggering events - payout or going back uphole - and it is the non-participating parties in the deep operations who are the overinvested parties. Recall that at this point in the General Matters forms, the parties have flipped positions and the deep participants have become the overinvested parties. An intriguing change in treatment. But is it better?
When adopting the Model Form, the preparer should review this provision carefully to make sure it provides the intended result.
F. Choice of Law
This is not a contentious issue but since I had so many agreements at hand, I did a survey of choice of law. It was fairly closely divided between Texas and Louisiana, with Louisiana winning by a small margin.
5. SUMMARY
Summary is easy. Those of you still using the General Matters form . . . GIVE IT UP!
It may seem easier to cling to an old form but the industry is moving inexorably to the Model Form. Most companies will have provisions in their General Matters forms that they wish to retain. I would recommend inserting those provisions into the Model Form rather than inserting provisions from the Model Form into a General Matters form. This is not to say that the Model Form will not require revision; its function is as with all forms – it is the starting place for drafting an agreement, not the final product. But the Model Form is the better place to start.
Attachment 1
Matters Requiring Approval By Vote
Matter: Non-Consent Penalty
Substitute/removal/successor Operator None
Trades of Confidential Data None
New Releases None
P & A None
Conclusion of Appraisal Operations None
Pre-Development Plan AFEs Underinvestment
Access to a Development System by participants None
in a subsequent Development Operation
Recompletion/workover in subsequent Dev Op %
Additional Facilities Not in Development Plan %
Expansion of Production System None
Approval of salvage of value if a withdrawal None
Settlement of claims / retaining outside counsel None
Model Form provides options to make these either Vote or Election matters:
X Project Team Underinvestment
X Development Plan Underinvestment
(in Final Design AFE)
X Exploratory Wells Forfeiture / %
X Dev Well included in a Dev Plan %
X Dev Well NOT included in a Dev Plan %
X Appraisal Wells %
Attachment 2
Matters Requiring Approval By Election
Matter Penalty
X Exploratory Well proposals Forfeiture / %
X Appraisal %
Operations at Objective Depth % (and underinvestment)
Substitute Wells % (forfeiture)
Supplemental AFEs Same as original operation
Participation in App. Well % (and underinvestment)
below Deepest Prod Reservoir
X Project Team Underinvestment
Sidetracking and Deepening % (and underinvestment)
Fab AFE for initial Dev System Forfeiture
Fab AFE for subsequent Dev System %
X Dev Well included in a Dev Plan %
X Dev Well NOT included in a Dev Plan %
Attachment 3
Matters Requiring Unanimous Consent
App Ops after conclusion of App Ops and before approval of Dev Plan
Revision to Well Plan
Major Modifications to Development Plan
[Non-op Participation in Major Mod. to Development Plan Underinvestment]
Third party use of excess processing capacity on a Facility and the attendant PHA
Determination of surplus slots if well on a platform is abandoned
Optional Matters:
X Dev Well included in a Dev Plan
X Dev Well NOT included in a Dev Plan
Attachment 4
Overinvestments / Underinvestments
Section Matter
10.2.2 Sidetracking and Deepening Exploratory Well
11.2.5 Sidetracking and Deepening Appraisal Well
13.2.5 Sidetracking and Deepening Development Well
13.4.2 Multiple Completions above/Below DPR
10.1.1 Revision of Well Plan
12.12.1 Major Revisions to Development Plan before Fabrication AFE
12.12.2 Major Revisions to Development Plan after Fabrication AFE
16.5.3 Geophysical Operations, Project Team, Pre-Dev AFEs
Attachment 5
Model Form Section 13.3
13.3 Development Well Proposals That Include Drilling Below the Deepest Producible Reservoir
Any Party may propose a Development Well with an Objective Depth below the Deepest Producible Reservoir, and in response to that well proposal each Party may, in writing, limit its participation in the drilling of that Development Well to the base of the Deepest Producible Reservoir to be penetrated by that Development Well. A Party who limits its participation in a Development Well to the base of the Deepest Producible Reservoir shall bear its Participating Interest Share of the Cost and risk of drilling that Development Well to the base of the Deepest Producible Reservoir (including abandonment), and it shall be a Non-Participating Party for the Deeper Drilling and shall be subject to Article 16.5.4 (Non-Consent Development Operations) in regard to the Deeper Drilling.
13.3.1 Multiple Completion Alternatives Above and Below the Deepest Producible Reservoir
If a Party Electing to limit its participation in a well to the base of the Deepest Producible Reservoir to be penetrated by the well under Article 11.3 (Appraisal Well Proposals That Include Drilling Below the Deepest Producible Reservoir) or Article 13.3 (Development Well Proposals That Include Drilling Below the Deepest Producible Reservoir) considers the well to be capable of producing at or above the Deepest Producible Reservoir and has notified the Participating Parties down to Objective Depth of its desire to complete the well at or above the Deepest Producible Reservoir, the well will be drilled subject to the following provisions:
(a) Multiple Completion: If before drilling of the well commences, all Participating Parties in the well agree that multiple well completions are possible and practicable and that those completions will involve (i) a completion at or above the Deepest Producible Reservoir and (ii) a completion below the Deepest Producible Reservoir, the Participating Parties in the Deeper Drilling will bear one hundred percent (100%) of the Costs of drilling the well to an Objective Depth below the Deepest Producible Reservoir, that are in excess of the original Costs to drill and complete the well in the Deepest Producible Reservoir.
(b) Single Completions: If prior to the commencement of the drilling of the well, the Participating Parties do not unanimously agree that multiple well completions are possible, then the first completion shall be at the objective deeper than the Deepest Producible Reservoir. A Non-Participating Party in the Deeper Drilling is an Overinvested Party in the well in an amount equal to its Participating Interest Share of the Costs of drilling the well to the Deepest Producible Reservoir, and the Participating Parties in the Deeper Drilling on the well are Underinvested Parties for that amount upon the first of the following events to occur:
(i) the well is not a Producible Well at a depth deeper than the Deepest Producible Reservoir and the well is plugged back to a zone at or above the Deepest Producible Reservoir;
(ii) the well is completed as a Producible Well at a depth deeper than Deepest Producible Reservoir, but Hydrocarbon production from that depth is later depleted prior to Complete Recoupment (in regard to Deeper Drilling) and the well is plugged back to a zone at or above the Deepest Producible Reservoir;
(iii) the well is completed as a Producible Well at a depth deeper than the Deepest Producible Reservoir and the Participating Parties have achieved Complete Recoupment (in regard to the Deeper Drilling) from Hydrocarbon production from a zone deeper than the Deepest Producible Reservoir,
(iv) the well is plugged and abandoned prior to an attempted completion at or above the Deepest Producible Reservoir.
The Underinvestment will be depreciated at the rate of one-half percent (1/2%) per month from the date the Deeper Drilling commences to the date the Non-Participating Party is entitled to share in the Hydrocarbon production from zones deeper than Deepest Producible Reservoir, but that depreciation will not reduce the Underinvestment below ________ percent (__%) of the original Underinvestment.
Attachment 6
General Matters Forms Comparable Section 13.3
13.4.2 Multiple Completion Alternatives Above and Below the Deepest Producible Reservoir
If a Non‑Participating Party in a Deeper Drilling operation below the deepest Producible Reservoir:
- considers the well to be capable of producing at or above the deepest Producible Reservoir, and
- has indicated a desire to complete the well at or above the deepest Producible Reservoir,
any further Deeper Drilling operations shall be conducted subject to the following provisions:
(a) Multiple Completion: If all the Participating Parties in the well agree that a multiple well completion(s) is possible and practicable involving (i) a completion at or above the deepest Producible Reservoir and (ii) a completion below the deepest Producible Reservoir, the Participating Parties in the Deeper Drilling operation shall bear 100% of the Costs of drilling to an Objective Depth below the deepest Producible Reservoir that are in excess of the original Costs to drill and complete the well in the deepest Producible Reservoir.
(b) Single Completions: If the Participating Parties do not agree that multiple well completions are possible or practicable, the Non-Participating Party in the Deeper Drilling operation shall be deemed overinvested in the original well in an amount equal to the Non- Participating Party's Share of the original Costs of drilling the well to the deepest Producible Reservoir. The Participating Parties in the Deeper Drilling operation shall assume their proportionate share of the Non‑Participating Party's Share of the Costs of other operations conducted under this Agreement until all overinvestments are eliminated.
If, after having been drilled to an Objective depth deeper than the deepest Producible Reservoir, at the first occurrence of the following events:
- the well is not a Producible Well in the deeper depths and the well is plugged back to a shallower zone; or,
- the well is completed as a Producible Well in the deeper depths, but Hydrocarbon production from the deeper zone is later depleted prior to Non‑Consent Recoupment (attributable to Deeper Drilling operation) and the well is plugged back to a shallower zone; or,
- the well is completed as a Producible Well in the deeper depths and the Participating Parties have recovered the applicable non-consent Recoupment (attributable to the Deeper Drilling operation) from Hydrocarbon production from the deeper zone,
the Participating Parties as to the depths below the deepest Producible Reservoir shall be deemed overinvested in an amount equal to the Non-Participating Party's Share of the well's Cost down to the deepest Producible Reservoir. The overinvestment shall be depreciated at the rate of one-half percent (1/2%) per month from the date the Deeper Drilling operation commences to the date the Non‑Participating Party is again entitled to share in the Hydrocarbon production from the deeper depths in the well, but such depreciation shall not reduce the overinvestment below forty percent (40%) of the original overinvestment. The Non‑Participating Parties in the Deeper Drilling operation shall assume their proportionate share of the Participating Party's Share of the Costs of other operations conducted under this Agreement until all overinvestments are eliminated.
Attachment 7
Surface
_______________________________________________
Party A 30%
Party B 35%
Party C 35%
In General Matters forms, Party A becomes overinvested here. __________________________________________________________
10,000= (Deepest Producible Reservoir)
Party B 50%
Party C 50%
In Model Form, Party A becomes overinvested here.
_________________________________________________________
15,000= (Deeper Objective)