PJVA/CAPL PAD SHARING AGREEMENT

Industry Introduction to Draft PSSA
April/May, 2016
Michael Bruch
Lorraine Grant
Jim MacLean
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An understanding of:
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Why the document has been created
What the major principles are
When the document will be completed
How you can help
Your belief that early participation in the comment
process offers significant positive near-term payoffs
for you and your employer
A greater sense of comfort as you review the draft
• The thought that went into them
• A sense that we’ve tried to “do the right thing”
 Addressing reasonably foreseeable issues with solutions that
you believe are reasonable
The Current State
 Increasing number of shared well pads in which wells and
facilities are not held in common interests
 Many shared pads already exist without any documentation in
place
 Looming issues and risks not widely appreciated at this time
The Opportunity
 Work collaboratively across industry associations to create a
precedent agreement for the typical Pad Site sharing arrangement
• Enhance awareness of issues
• Critical industry review to optimize business outcomes
• Create consistency, certainty and a more timely and simplified
completion of required documentation
• Other industry projects demonstrate the major benefits to
industry from the creation of precedent agreements of this type
“Doing nothing is not an option.”
 An
industry problem requires an industry
solution
 Collaboration of PJVA and CAPL,
together with PASC and CAPLA
• Blend of PJVA CO&O and CAPL OpProcedure
• Pending PASC Pad Cost Sharing Guidelines
• CAPLA “pre-launch” luncheon and survey
support
 PJVA
as custodian due to shared facility
and similarities to CO&O
A cross-section of industry stakeholders with diverse experience
directly represented on the joint task force currently
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Michael Bruch, Chairman, ConocoPhillips (PJVA)
Lorraine Grant, Drafting Chair, ConocoPhillips(PJVA/CAPL/CAPLA/PASC)
Keith Brereton, Brereton and Associates (PJVA)
Jeff Brewer, Shell (CAPL)
Jonathan Cassetta, Cenovus (PJVA)
Steffany Colvinns, Vermilion (PJVA)
Danica Doucette-Preville, Gowlings (Legal)
Rein Evelein, Jupiter (PJVA)
Richard Grant, Gowlings (Legal/CAPL)
Susan Levy, Velvet (CAPL/CAPLA)
Jim MacLean, Repsol (CAPL/CAPLA/PJVA)
Gord McLean, Chevron (PJVA)
Amy Oliverio, Enerplus (PJVA)
Earl Robins, Independent (PASC)
Gary Shepherdson, Apache (Land)
Beth Swift-Hill, Westbrick (PJVA/CAPL)
Other ongoing linkages into CAPL, CAPLA, PASC, PJVA and the
AER
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Project comprised of three components-engagement, the
document and “after care”, to create a final document that
will be used by industry
Initial draft issued at end of April, 2016
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Web enabled release through PJVA, CAPL, CAPLA and PASC
Plan to issue second draft in the fall
Subsequent schedule dependent on the nature of the comments
Planned completion by mid-2017
Emphasis on awareness, education, engagement,
transparency and responsiveness over the project
• Extensive annotations to facilitate review and understanding
• Rollout to larger and more active companies in conjunction with
release
• Early morning education sessions through PJVA
• Sharing of verbatim comments on each draft and our responses
• Additional iterations with commenting parties
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Address substantive issues by building on familiar industry standards
• Starting point is 1999 PJVA CO&O Agreement, as modified to reflect
modern CAPL updates to 1990 CAPL Operating Procedure type
clauses
• Breadth and depth of coverage in a user friendly format
Create a document that will be widely used shortly after completion
• Focus on building engagement throughout the project
• Demonstrate responsiveness during comment phase
• Extensive annotations to benefit users of all experience levels and
backgrounds (i.e. JV or Land)
• Design around the more typical Pad Site scenarios-80% solution
• Onus on users to create any special, customized outcomes
• Provide outcomes that users regard as balanced
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Minimize effort to negotiate and administer Pad Site sharing agreements
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Align document with evolving business needs to mitigate risk
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A Pad Sharing may initially appear to be a simple sharing of surface
rights to decrease the environmental footprint and lower costs
• Cost of Pad Site construction and the associated installation of the
shared facility will typically also be very modest (typically $1.53MM) relative to the investments in the wells (typically $615MM+/well)
The relationship of the Owners is actually much more complex
• Issues resulting from differences in ownership between the Pad
Site (and the related common facility) and the wells
 Need a relationship between owners of the respective assets
 Likelihood of staged abandonment of the Pad Site
 Require certainty for respective rights and obligations (e.g.,
liability and indemnification, conduct of operations)
Foundation of the agreement is the ongoing need to manage the
blended interest facility and Pad Site and the relationship to the wells
• Co-existence of land interest sets and JV approaches is analogous
to a unit agreement
 Use
of established PJVA and CAPL
approaches and language adds length
• But actually simpler for users to work with than a
shorter heavily customized document
• Flexibility to accommodate specific needs
• Offers greater protection for an incident that
damages assets anywhere on the well pad
• Providing users with a “car manual” that
addresses potential real world problems
 “80%
solution”-later slides present context
 PJVA
CO&O structure of Head Document,
Operating Procedure and Appendices
 Head Document and Operating Procedure
structured to minimize number of elections
• Could often use as a “staple on” for a typical Pad Site
 Some
traditional CO&O Appendix content
in Operating Procedure (e.g., Insurance)
 Annotations as education and reference tool
 Plainer language emphasis
• Subdivision of longer provisions, use of headings
for each Subclause, words of context for most
cross-references to minimize page flipping
 Modest
investment for site construction and
shared facilities, relative to wells
 Single Pad Site Operator
 Blended Pad Site ownership based on well
count
 OPEX and any fee revenue from third
parties shared based on pad ownership
 Simple facilities (e.g., pipeline, group
separator, shared tanks)
 Well specific activities under Land Ag’t.
 Chose
not to add content for a multitude
of low probability “what if” scenarios
 Owners may address any anticipated
special needs beyond the 80% solution
using flexible features in the PSSA or
through inclusion of custom content
 Annotations will provide assistance
 “Off ramp” to a full PJVA CO&O
Agreement if Owners regard it as
appropriate
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Single Operator on a Pad
Probably the biggest initial concern for PSSA reviewers
OH&S “Prime Contractor” requirements major driver
• See special Addendum at end of Exhibit A annotations.
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Site Operator controls all operations on the Pad Site
Independent operations by a non-operator should be
on a separate pad
PSSA modifies JOA rights of other Owners to conduct
independent operations (Article VI of Exhibit A)
Owners can modify PSSA to deliver a different outcome
if so inclined
Relationship to Mineral Land Agreements
 PSSA
amends mineral land agreements
 All well specific activities continue to be
under the governing Land Agreement,
including operation and well specific
reclamation
 PSSA creates relationship for all Owners re
cross-indemnities
 Addressed in more detail in Article VI
review.
Define What is Shared on a Pad
 Surface
Lease
 Access
Road
 Surface Facilities to be shared by Pad
Wells (vs. well eq’t for individual well)
 Tie-in Pipeline(s) leaving the Pad Site
 Wells
and well specific eq’t not shared
Determination of Shared Pad Interest
 PSSA not needed when all wells are under
the same mineral land agreement with same
WI, assuming a 1990-2015 CAPL governs
 With different well ownerships, the PSSA
assumes a blended Pad Site interest based
on well count/ownership
 Important to track capital investment in
wells separately, versus shared facilities
Pad Site Operated by Company A
Well 1:
Company A 50%
Company B 50%
Well 3:
Company A 75%
Company C 25%
Well 2:
Company A 50%
Company B 50%
Pad Site
Blended W.I.
Company A 62.5%
Company B 25%
Company C 12.5%
Well
Equip
Well
Equip
Well
Equip
Well 4:
Company A 75%
Company C 25%
Well
Equip
Pad Site
Facilities
Tie-in
Pipeline
Access Road
 Based
on PJVA CO&O Head Document
 Defines Facility, Pad Site and Surface to set
the stage for the document
 List of Appendices
 Operating Procedure changes require 100%
OpCom approval (insurance exception-503)
 Other Appendices amended by vote
 Identifies Site Operator, Effective Date
 Need to address prior commitments if
retrospective Effective Date
 Largely
a blend of PJVA CO&O Ag’t and
CAPL Operating Procedure definitions
 Definitions to address interrelationship
with mineral rights-Land Activity, Land
Agreement, Land Election Right, Land
Election Right Holder
 Differentiate between production based
on location-Pad Site Substances & Off Pad
Site Substances re priority to Capacity
 Permitted
Use-Appendix I outlines any
restrictions on use (e.g., sour, oil vs gas)
 Well- located on Pad Site
 Outside Well- located off Pad Site
 Well Equipment-Well specific equipment
managed and owned by Well Owners
under Land Ag’t, including connection to
the shared Facility
 Well Owner-mineral right owner of Well
 Blend
of PJVA CO&O Agreement and
CAPL Operating Procedure
 References-updated with CAPL content
 Conflicts-updated with CAPL content
 Provisions for management of
Appendices based on PJVA CO&O
Agreement
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Based on PJVA CO&O Agreement with minor changes
Incorporates an Operating Committee governance
structure, with negotiated voting thresholds
No independent operations provisions
Offers Owners significant flexibility to manage the shared
assets
Voting procedure used to approve expenditures, with less
than unanimous approval typically required
Specific voting provisions for removal and replacement of
Site Operator & amendment of Appendices
Deals with Operating Committee structure, voting and
meeting procedures
 Blend
of PJVA CO&O Agreement and
CAPL Operating Procedure
 Increased emphasis on distressed
operators
 Courts exercising discretion to entrench
insolvent operators, notwithstanding
ag’ts
 Clause
401 re control and management of
Joint Operations very similar to CO&O Ag’t
 Clauses 401, 406 and 407 modified to
provide greater protection of Site Operator
by requiring Gross Negligence or Wilful
Misconduct for sole liability as in 2015 CAPL
• Protect Site Operator from breach of contract claims
 Clause
405 re Non-Operating Owner
access- modified based on 2015 CAPL and
site restrictions
 Clause 407-HSE Clause based on 2015
CAPL (See also Appendix VI-abandonment)
 Insurance
provisions included in Exhibit A,
rather than in an Appendix as in a CO&O
 Protection for all assets on site, including
Wells, through cross-indemnities
• Total $ invested much larger than typical Pad Site $
 Provisions
likely to be fairly standard, other
than Clause 503 coverages
 Owners able to modify types and amounts
of Clause 503 coverage by vote to achieve
traditional Appendix outcome
 Land
Activities not conducted under
PSSA
 PSSA modifies to some degree rights and
obligations under Land Agreements (e.g.,
allocation of surface re drilling costs,
single Site Operator, restriction on NonOperating Owner conducting operations)
 Possible
that Site Operator not a Well
Owner, but unlikely in practice
• Typical Pad Site will see Site Operator as the
instigator to the PSSA because of its involvement in
all or substantially all Wells
• Contract operating ag’t if Site Operator not a Well
Owner
• Onus on Owners to address exceptions, vs inclusion
of complex “what if” content about downhole ops
 Site Operator’s duties in allocation of costs
 Creation of cross-indemnities
 Wells abandoned under Land Agreement
• See also Appendix VI re abandonment
 Clause
606 handling of “Land Election
Rights” (convertible ORRs, penalties)
 Relates to the applicable Well Owners and
Land Election Right Holder (s/b a party)
 Contingent Participation identified
 Adjustments received from other Wells
reduce the applicable cost base
 Adjustments paid to other Owners for
Facility treated as equipping cost
 Election process when conditions met
 “Off
ramp” mechanism allows a facility to
be moved from PSSA to a CO&O Ag’t if
OpCom determines that is appropriate
 The separate CO&O Agreement largely
treated like a Land Agreement for PSSA
purposes
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Site Operator as operator
Cross-indemnities and insurance
Cost allocations
Responsibility for decommissioning in due course
 PSSA
continues to govern Pad Site, including
any facilities not moved to the CO&O
 Indemnity
and liability provisions and
annotations largely based on 2015 CAPL
 Updated definitions of Extraordinary
Damages, Gross Negligence or Wilful
Misconduct & Losses and Liabilities
 Clarifications for claims for breach of
contract and sharing of judgments
against Joint Account
A
blend of PJVA CO&O and 2015 CAPL re
financial matters
 Updated default remedies re CAPL (e.g.,
right to take defaulting Owner’s volumes,
various general supporting provisions)
 Updated commingling provisions re
CAPL to allow OpCom to require a trust
account if courts prevent replacement of
insolvent Site Operator
A
simple measurement provision similar
to that included in 2015 CAPL
OpProcedure
 Ultimately links back to standard in the
then most current PJVA CO&O
Agreement
 Adding a CO&O Ag’t type provision
would have been overkill for the minor
facilities typically subject to a PSSA
A
failure to take in kind Article similar to the
PJVA CO&O Ag’t provision
 Limited application in practice as failure to take
in kind normally dealt with under Land Ag’t for
wells or under CO&O Ag’t/GHA at a
downstream processing facility
 Administration fee-2.5%, rather than a
negotiated fee
• Owners can negotiate something different
• Desire to avoid unnecessary elections
 Disposition
process similar to 2003 PJVA
Unit Agreement-typically a broad right
 Disposition contingent on compliance
with requirements under any Land Ag’t
• Linkage of Wells and Pad Site
• Related PSSA Participation as part of land ROFR
 Uses
CAPL Notice of Assignment process
• First day of second Month following NOA receipt
• See December 2014 CAPL Negotiator article for
introduction to concepts
 Updated
Term provision to align to 2015
CAPL to address ongoing obligations under
Regulations re abandonment issues
 Well abandonments and related reclamation
& remediation responsibility of applicable
Well Owners
 See also Appendix VI for elaboration about
other abandonment responsibilities
 Trying to avoid “last man standing” issues
 Confidentiality
Article updated to reflect
2015 CAPL OpProcedure
 Better handling for potential dispositions
to third persons-permitted disclosure at
the data room stage
 Confidential information most likely to
be obtained under the applicable Land
Agreement in practice, rather than PSSA
 Misc
general provisions that largely reflect
updates in the 2015 CAPL Op Procedure
 Such as No Partnership; Force Majeure;
Notices; Suits; Governing Law; Waiver; AB
Limitations Act; Further Assurances; Conflict
of Interest; No Implied Covenants; Waiver of
Relief; Dispute Resolution; Supersedes
 Potential electronic distribution of notices
through service provider-Subclause1504(b)
 Describes
all assets governed by the PSSA
(surface lease, tie-in pipeline, shared
surface facilities)
 Defines Permitted Use of the Pad Site producing formations, oil vs gas wells,
sweet vs. sour
 Documents ownership of each well and
resulting blended Pad Site Participation
 Defines basis for allocation of capital and
operating costs and distribution of nonOwner fee income
Sharing of Operating Costs
 Ensure individual well costs are applied
to wells and only shared costs to the Pad
Site
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See also Clause 603 of Exhibit A
 Allocate
OPEX for the typical pad site
based on Pad Site blended ownership
 Modify PSSA to divide shared costs
based on throughput if required
 Document
does not dictate which version of
PASC Owners will use
• Reflects periodic updates to the document and the
uncertain timing for industry acceptance of a new
version of the PASC Accounting Procedure
• 2011 PASC as Alternate 1, as current standard
• 1996 PASC as Alternate 2
• ____ PASC as Alternate 3 to accommodate future
updates by PASC
 Linkage
to pending PASC Shared Pad Costs
Accounting Guidelines (Head Doc)
Sets Pad Site facility capacity
Changes to facility capacity require Owner approval
Each Owner has the right to use its owned share of
capacity plus available Surplus Capacity
 Surplus Capacity is shared by the Owners in
proportion to Participation
 Pad Site Facility may handle Owner or non-Owner
Off Pad Site Substances but Pad Site Substances have
first priority
 Non-Owners using surplus capacity will pay a fee
approved by the Pad Site Owners
 These are 80% solution provisions and may be
modified if desired by the Owners
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 Documents
AFEs and actual costs for
Initial Construction of the Pad Site and
shared facilities and any subsequent
Enlargements
 For an Enlargement, the historical
investment value may be used to
determine a new Pad Site Participation
 Investment values are also used to
calculate capital fee rates for non-Owner
usage of the facility
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Based on PJVA CO&O Agreement with minor changes
Describes Enlargement process – proposal, approval
(unanimous), participation, AFE approval, construction,
Capacity and Participation adjustments
An Enlargement may involve expanding the Pad Site
lease and/or the facilities
Participation in an enlarged Pad Site may continue to
be based on Well count, or could change to a capacity
or invested capital basis
An Enlargement could result in creation of a new
Facility Functional Unit, or a split into Surface and
Facility Functional Units
 Reflects
particular sensitivities about
different Well ownership and staged
abandonment
 Well abandonment for account of Well
Owners (Cl. 605 of OpProc & Land Ag’t)
 Remainder of Pad Site-Owners, subject to
a special allocation for any incidents
 Phase I and Phase II Assessment frame
 Potential early exit feature if OpCom
approves
 Number
of shared well pads without
agreements is growing exponentially
 Absence of agreements introduces risk
• No rules for ongoing management of Facility re
priorities, Enlargements, costs, etc.
• Status of Non-Operators and use of shared pad
• Application of normal negligence test to Operator
• No contractual obligations re indemnity & liability
 Doing
nothing is not actually doing nothing
It’s a voluntary choice to assume risk
Invest time in the document early in the comment phase
 Assess it on its merits and offer feedback to help improve the document
 Encourage your peers to do the same
 Optimize the quality of the document and the transition to wide use
Comment in a way in which resources are used most efficiently
 Provide a single coordinated response from a company, vs individual
responses or separate, potentially inconsistent JV and Land responses.
 For other than typo type things, the most helpful comments identify the
concern, why it is a concern and how it might be fixed
 Try to minimize little drafting preference type comments that say the
same thing in a slightly different way without actually changing anything
Together, we can address a major industry issue that is increasingly
affecting each of us, where “doing nothing is not an option”
Thanks for taking this part of the journey with us!
Thank You!