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About Joint Operating Agreements

The Law Office of C. William Smalling, P.C. Dec. 27, 2018

A commonly used instrument in the oil and gas industry is the joint operating agreement. A joint operating agreement is a contract for the exploration, development, and production of gas and oil properties among cotenants. Below is an overview of joint operating agreements in Texas.

Leasehold Ownership

In most cases, a fee gas and oil estate is owned in undivided fractional shares. The owners of these shares then execute gas and oil leases to lessees, who then own the leasehold estate in undivided fractional shares. These lessees often assign their shares to third parties. Thus, most oil and gas properties are concurrently owned by several cotenants.

Drilling without A Joint Operating Agreement

In Texas, a cotenant may drill for and produce gas and oil without consent of the other cotenants. However, a cotenant who takes such an action bears all the risk, and this cotenant must also account to the other cotenants for their share of production. However, it is often unclear which costs a cotenant is entitled to recover from the other cotenants. One way to solve this problem is through the execution of a joint operating agreement.

The Relationship of Cotenants Under a Joint Operating Agreement

A joint operating agreement describes the terms and conditions under which an operator shall conduct operations. Typically, joint operating agreements include terms and conditions related to issues such as:

  • Drilling of an initial well

  • Voting procedures for future subsequent operations

  • Payment for operations under the agreement

When a joint operating agreement is executed, the parties to the agreement appoint one party to act as the operator. The operator named in a joint operating agreement conducts and directs all operations in the contract area. The other cotenants are considered to be non-operators. Non-operators retain indirect control of the operations in the contract area through inspection rights, the right to vote on subsequent operations, and the right to decide whether to give consent for subsequent operations covered under the agreement.

Texas Oil and Gas Attorney

Oil and gas laws are always changing. Therefore, it’s imperative that those involved in the energy industry have reliable, experienced, and knowledgeable legal representation to help guide them through the ever-changing energy landscape. In the areas of oil and gas, it’s particularly important to ensure that contracts, such as joint operating agreements, are properly drafted. Oil and gas contracts are sophisticated documents, and it’s important that they be drafted in a manner that ensures the rights and responsibilities of all parties involved. At the Law Office of C. William Smalling, P.C., we are highly experienced in the drafting and review of such contracts, including joint operating agreements, farm-out agreements, master service agreements, drilling contracts, licensing agreements for use of seismic or technical data, and nondisclosure agreements. If you are in need of expert oil and gas legal representation, contact us today for a consultation.