Oil, Gas, and Energy Contracts Attorney in Houston, Texas
One of the main reasons I became a lawyer in Houston is because I knew that the energy industry needed someone who not only knew the law but knew the business and the science to represent them. I decided I could be that someone, and consequently I get to help America’s energy companies meet their legal needs.
One of the main services we provide is the drafting and review of oil and gas contracts. Unlike run-of-the-mill business contracts, oil and gas contracts are not something to be done haphazardly. It takes an expert oil and gas attorney to draft a contract that ensures the rights and responsibilities of all parties involved are carefully delineated.
The importance of an oil and gas attorney negotiating and drafting good contracts in Houston can be summarized as follows:
Contracts are the bedrock of doing business in the oil and gas industry.
While some risks and disputes are inevitable, most risks are unnecessary and avoidable.
The causes of these risks and the resultant disputes frequently are rooted in the detail of the associated contracts.
Litigation resulting from a bad contract is expensive and time-consuming.
Good, clear contracts can reduce litigation.
Successful contracts are easily and unambiguously interpreted.
Good contracts lay out the expectations and intentions of both sides.
In writing contracts, it is critical to be consistent in style, terminology, and definitions.
The analysis of a client’s objectives and the conversion of said objectives into a solid, easily interpreted contract is of the utmost importance.
Common oil and gas contracts I have drafted as an energy attorney are:
Joint Operating Agreements
A joint operating agreement ("JOA") is a contract where two or more parties who own undivided interests or unitized interests in a contract area agree to join together for the drilling, development, and operation the contract area. The JOA helps define the relationship between the party managing the operation and the parties whose participation in decision-making is limited. Like standard oil and gas leases and deed clauses creating an exclusive executive right, on-shore operating agreements entrust virtually all significant managerial decisions to one party. All parties to the JOA participate in the first well (initial well) paying costs and sharing the profits in accordance with each party's interest share.
A farm-out is an agreement where a party that holds a working interest in an oil and gas lease (farmor) agrees to assign all or part of that interest to another party (farmee) contingent upon the farmee completing a set of stipulated conditions. The term farmout describes a transaction in which the owner of an oil and gas lease, the farmor, agrees to assign the lease to another, the farmee, contingent upon the farmee completing a set of stipulated actions. Farmout agreements may include some or all of the following provisions: that the farmee drill a well to a specific depth for a defined period of time, or producing a certain volume of oil and gas. These contingencies are generally considered to be the identifying characteristics of a farmout agreement. The farmor normally retains an overriding royalty interest in the assigned lease. The parties to a farmout have a great deal to gain from entering into this type of transaction. However, if the farmout is not properly drafted, the parties stand to lose the benefit of their respective bargain, pay unnecessary attorney fees and court costs, and waste hundreds of work hours attempting to remedy problems that could have been avoided with proper documentation of the transaction.
Master Service Agreements
Master Service Agreements ("MSA") are an important part of a company's risk allocation plan. An MSA allows a company to obtain favorable terms in advance without having to negotiate while work is waiting to be performed; this also allows a more proactive approach to business. Examples are potential restrictions on indemnity or insurance. In addition, a company's various MSAs may be coordinated with other contracts the company will use, such as drilling or construction contracts. Without a consistent approach, contracts that appear favorable when viewed alone may be so inconsistent that they create unintended exposures. A company in the oil and gas business will need the services of various contractors to perform different types of work. The MSA is a way to enter into an agreement in advance with its contractors as to what terms and conditions will govern such work. The MSA is designed for services that are performed by oil and gas service contractors on a repetitive basis, such aswell services, on-going labor, and equipment maintenance.
Confidentiality and Nondisclosure Agreements
The confidentiality agreement is used when a landman/geophysicist/geologist/promoter has found what is believed to be a prospect and is now going to show that data and work product to a possible investor or industry partner. That may be presented before a farm out agreement is entered into, and the promoter may be showing his data before going into a farm out stage. The confidentiality agreement may be used as a part of the sales process, where a company which is trying to sell its prospects on the open market may require a confidentiality agreement as part of the negotiation process. When an investment banker is used, confidentiality agreements are used to ensure that the investment banker doesn’t sell that information to some of its other clients.
Drilling rigs are the exclusive means by which oil and gas exploration and production companies physically drill a well into the earth. Drilling rigs are primarily owned by specialized oilfield services companies (drilling contractors). The equipment, expertise, and labor required to drill an oil and gas well are capital intensive and require continuous utilization in order to ensure the proper return on the investment for the owners of a rig. Few oil and gas companies today maintain a fleet of drilling rigs. Because oil and gas companies focus its expertise on locating reserves rather than drilling techniques, the oil and gas service industry is populated with companies that specialize in drilling oil/gas wells and completion activities. Drilling contractors own drilling rigs and ancillary equipment such as drill pipe and are available on a contract basis to drill and equip wells for the production of liquid/gas hydrocarbons. The contractor furnishes equipment, labor and performs services for the drilling of a specified well at a certain location approximated in the contract, but to a maximum depth limitation. Contractors usually deploy their assets based on the rated capacity of the drilling rig as to depth, creating a limitation as to the types of wells that can be drilled by any given rig. Drilling of a particular well by the contractor for an operator (landowner, mineral owner, lessee or the like, who controls the leasehold and will be the owner and operator of the completed well) comes under one of several types of drilling agreements, which fall under the broad categories of day work, footage, or turnkey contracts.
Licensing Agreements for Use of Seismic or Technical Data
Oil and gas exploration companies usually acquire seismic data in one of several ways: (i) they conduct their own geophysical survey or seismic shoot (a "proprietary seismic survey"); (ii) they join with a group of other exploration companies to conduct the seismic shoot (a "participation survey" or "group shoot"); or (iii) they acquire the data from the owner of the data through an outright purchase, a license, or other use arrangement. Regardless of the type of contract, the overriding consideration is keeping the information confidential. If seismic data loses its confidentiality, the competitive advantage of owning it or licensing it is lost. A proprietary seismic survey often requires an investment of millions of dollars. With a Geophysical Services Contract, the exploration company contracts with a geophysical contractor to conduct the work on behalf of the explorer. The explorer requesting the survey and the geophysical contractor that will conduct the survey normally sign a general or master geophysical services agreement containing general terms and conditions (the "Master Agreement"), and a supplemental agreement for each specific survey to be conducted (the "Supplemental Agreement"). The Master Agreement contains a general statement of the nature of the work to be performed by the Contractor, with the specifics of the survey contained in the Supplemental Agreement. One of the first issues the parties must face is whether the survey will be on a turnkey basis, a day work basis or some other basis. A turnkey contract is the most common and is where the parties essentially agree to a flat fee arrangement. The Company generally agrees to pay the Contractor a certain rate per square mile of data.
Units, Pooled and Fieldwide
In Texas and other states, there is, either by the terms of the lease or by various statutes, the ability to combine leases in order to prevent waste, and to rationally develop natural resources. In Texas, wells are assigned allowables; that is, the maximum amount of oil or gas that can be produced from given acreage. One can get the maximum allowable for a well on 40 acres. In the case where one has 25 acres under lease, the lease line is “jumped”, if the leases permit. Some acreage is combined from an adjacent lease to get a full 40 acre allowable. That is done through the mechanics of pooling, where two leases combine. Combining leases in pooled units is common in Texas. In Oklahoma and in other states, if the leases don’t permit, the governmental authorities having jurisdiction have the authority to force pool – that is, combine the leases by order of the Commission. Texas is a difficult place for forced pooling; the Texas Mineral Interest Pooling Act is much less flexible. As a practical matter, if a voluntary agreement cannot be reached in Texas, forced pooling is difficult.
Negotiating Indemnity Clauses in Oil and Gas Service Agreements
Drilling operations can be dangerous.A blowout can result in great exposure to liability for property damage, personal injury, pollution, and other damages. One contracting practice which the operators and contractor use to manage and regulate their risks and responsibility is the indemnity clause. An indemnity is a contract between two parties in which one agrees to be liable for loss or damage sustained by the other and or a third party from a specified act or condition or damage which results from a claim or demand. The important features of indemnity include:
Indemnity provisions are a matter of contract negotiation;
Include the choice of common law fault-based of risk versus contract-based allocation of risk;
Indemnity agreement is only as good as the financial resources of the party who gives it and that party's insurer;
Get the insurance certificate;
Make sure that the obligation assumed under the indemnity clause is properly insured;
Craft the agreement around the applicable laws such as, Texas Oilfield Anti-Indemnity Act, the Texas Express Negligence Doctrine; and
Include a survival provision.
For your business situation, I can tailor oil and gas contracts to meet your needs and ensure that you are getting a fair deal. Additionally, I review contracts that have been drafted by others to make sure that they accurately and fairly reflect the offer that has been made to you.
I am the kind of lawyer an energy company needs. As a former engineer, I understand the science and I know the numbers. As your oil and gas lawyer, I can help you navigate the legal system. My office is located in Houston and works with client companies that have a significant presence in Texas, so don’t hesitate to give us a call to schedule an initial consultation where we can discuss how we can help you master the legal and regulatory challenges that are holding your business back.
Primer - Oil and Gas 101
The oil and gas extraction industry can be classified into four major processes: (1) exploration, (2) well development, (3) production, and (4) site abandonment.
Exploration involves the search for rock formations associated with oil or natural gas deposits and involves geophysical prospecting and/or exploratory drilling.
Well development occurs after exploration has located an economically recoverable field, and involves the construction of one or more wells from the beginning (called spudding) to either abandonment if no hydrocarbons are found, or well completion if hydrocarbons are found in sufficient quantities.
Production is the process of extracting the hydrocarbons and separating the mixture of liquid hydrocarbons, gas, water, and solids, removing the constituents that are non-saleable, and selling the liquid hydrocarbons and gas.
Production sites often handle crude oil from more than one well. Oil is nearly always processed at a refinery; natural gas may be processed to remove impurities either in the field or at a natural gas processing plant.
Site abandonment involves plugging the well(s) and restoring the site when a recently-drilled well lacks the potential to produce economic quantities of oil or gas, or when a production well is no longer economically viable.
Two ancillary processes are the maintenance of the well and reservoir is important in sustaining the safety and productivity of the operation and in ensuring the protection of the environment.